[Federal Register Volume 74, Number 15 (Monday, January 26, 2009)]
[Rules and Regulations]
[Pages 4510-4536]
From the Federal Register Online via the Government Publishing Office [www.gpo.gov]
[FR Doc No: E9-1443]



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Part II





Library of Congress





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Copyright Royalty Board



Copyright Office



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37 CFR Part 385



Mechanical and Digital Phonorecord Delivery Rate Determination 
Proceeding; Review of Copyright Royalty Judges Determination; Final 
Rule and Notice

  Federal Register / Vol. 74, No. 15 / Monday, January 26, 2009 / Rules 
and Regulations  

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LIBRARY OF CONGRESS

Copyright Royalty Board

37 CFR Part 385

[Docket No. 2006-3 CRB DPRA]


Mechanical and Digital Phonorecord Delivery Rate Determination 
Proceeding

AGENCY: Copyright Royalty Board, Library of Congress.

ACTION: Final rule.

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SUMMARY: The Copyright Royalty Judges are announcing their final 
determination of the rates and terms for the use of musical works in 
physical phonorecords, permanent downloads, and ringtones and are 
adopting as final regulations the rates and terms for the use of 
musical works in limited downloads, interactive streaming, and 
incidental digital phonorecord deliveries.

DATES: Effective Date: March 1, 2009.

ADDRESSES: The final determination also is posted on the Copyright 
Royalty Board Web site at http://www.loc.gov/crb/proceedings/2006-3/dpra-public-final-rates-terms.pdf.

FOR FURTHER INFORMATION CONTACT: Richard Strasser, Senior Attorney, or 
Gina Giuffreda, Attorney Advisor. Telephone: (202) 707-7658. Telefax: 
(202) 252-3423.

SUPPLEMENTARY INFORMATION:

I. Introduction

    This is a rate determination proceeding convened under 17 U.S.C. 
803(b) and 37 CFR 351. A Notice announcing commencement of the 
proceeding with a request for Petitions to Participate to determine the 
rates and terms of royalty payments \1\ for the making and distribution 
of phonorecords, including digital phonorecord deliveries (``DPDs''), 
under the statutory license set forth in Section 115 of the Copyright 
Act was published in the Federal Register on January 9, 2006. 71 FR 
1454. The rate to be paid to songwriters and music publishers for the 
reproduction and distribution of their musical works in physical 
phonorecords and permanent digital downloads is the larger of 9.1[cent] 
or 1.75[cent] per minute of playing time (or fraction thereof) for the 
entire license period; the rate to be paid under section 115 for 
ringtones is 24[cent]. Consistent with our adoption of the same term 
for late payments in the Webcaster II and SDARS determinations, 72 FR 
24084, 24107 (May 1, 2007) (Webcaster II), 73 FR 4080, 4099 (January 
24, 2008) (SDARS), we are establishing a late payment fee of 1.5% per 
month measured from the date the payment was due as provided in the 
regulations of the Register. See 37 CFR 201.19(e)(7)(i). Section 
803(d)(2)(B) of the Copyright Act governs the effective date of the 
rates and terms established in this proceeding. 17 U.S.C. 803(d)(2)(B). 
The parties submitted a settlement regarding the rates to be paid to 
songwriters and music publishers for the reproduction of their musical 
works in limited downloads, interactive streaming and incidental DPDs 
and that settlement was published for comment pursuant to 17 U.S.C. 
801(b)(7)(A)(i). Having received no objection to the settlement from 
any participant, we are adopting the settled rates and terms as final 
regulations. The effective date of these rates and terms also is 
governed by 17 U.S.C. 803(d)(2)(B).
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    \1\ Section 115 divides the responsibility of setting terms 
governing royalty payments between the Copyright Royalty Judges and 
the Register of Copyrights. See 17 U.S.C. 115(c)(3)(C) & (D) 
(setting forth Judges' authority) and (b)(1) & (c)(4)-(5) (setting 
forth Register's authority); see also, Final Order, Division of 
Authority Between the Copyright Royalty Judges and the Register of 
Copyrights Under the Section 115 Statutory License, Docket No. RF 
2008-1, 73 FR 48396 (August 19, 2008); see also infra at Section V.
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II. This Proceeding

A. Procedural History

    The following entities filed Petitions to Participate in response 
to the January 9, 2006, request: Royalty Logic, Inc. (``RLI''); the 
Songwriters Guild of America (``SGA''); the National Music Publishers' 
Association, Inc. (``NMPA''), the Songwriters Guild of America, and the 
Nashville Songwriters Association International, jointly (collectively, 
``Copyright Owners''); Apple Computer, Inc.; America Online, Inc.; 
RealNetworks, Inc.; Napster, LLC; Sony Connect, Inc.; Digital Media 
Association (``DiMA''); Yahoo! Inc.; MusicNet, Inc.; MTV Networks, 
Inc.; and Recording Industry Association of America (``RIAA'').
    Following an unsuccessful negotiation period, the following parties 
filed written direct statements by the November 30, 2006 deadline: 
RIAA; Copyright Owners; and DiMA, joined by its member companies 
America Online, Inc., Apple Computer, Inc., MusicNet, Inc., Napster, 
LLC, RealNetworks, Inc. and Yahoo! Inc.\2\ RLI filed its written direct 
statement on March 2, 2007.\3\
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    \2\ Yahoo! Inc. and Napster LLC each subsequently withdrew from 
the proceeding. See Yahoo! Inc. Notice of Withdrawal of Petition to 
Participate (filed August 24, 2007) and Napster, LLC Notice of 
Withdrawal (filed October 19, 2007).
    \3\ The Judges never officially accepted RLI's written direct 
statement. That aside, RLI's direct statement made clear that its 
participation was solely ``on the issue of competition among agents 
for the licensing of musical works and/or the collection and 
distribution of royalties, on behalf of copyright owners and/or 
their agents.'' RLI Written Direct Statement at 1. Subsequently, RLI 
and the Copyright Owners stipulated that RLI would not participate 
in the direct or rebuttal phases of the proceeding or the closing 
arguments unless the issue identified in RLI's direct statement was 
raised at any point in the proceeding. See Joint Stipulation 
Regarding Participation by Royalty Logic, Inc. in the Above-
Captioned Proceeding (filed February 1, 2008). The issue was not 
raised.
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    Discovery was followed by live testimony. Testimony in the direct 
phase was taken from January 28, 2008, to February 26, 2008. Copyright 
Owners presented the testimony of the following witnesses: Mr. Rick 
Carnes, songwriter, and President, Songwriters Guild of America; Mr. 
Steve Bogard, professional songwriter and President, Nashville 
Songwriters Association International; Mr. Roger Faxon, Chairman and 
Chief Executive Officer (``CEO''), EMI Music Publishing; Mr. Philip 
Galston, songwriter, music publisher and record producer; Ms. Victoria 
Shaw, songwriter; Ms. Maia Sharp, singer, songwriter and musician; Mr. 
Steven Paulus, composer; Mr. Irwin Z. Robinson, Chairman, Paramount 
Arabella Music; Ms. Claire Enders, CEO, Enders Analysis; Mr. David 
Israelite, President and CEO, NMPA; Mr. Ralph Peer, Chairman and CEO, 
Peermusic, Inc.; Ms. Helen Murphy, President, International Media 
Services, Inc.; Dr. William Landes, Clifton R. Musser Professor of Law 
and Economics, University of Chicago Law School; and Mr. Nicholas 
Firth, former Chairman and CEO, BMG Music Publishing Worldwide.
    RIAA presented testimony from the following witnesses: Mr. Geoffrey 
Taylor, CEO, British Phonographic Industry; Mr. Richard Boulton, Global 
Managing Director, Finance and Accounting Services; Ms. Linda 
McLaughlin, Senior Vice President, National Economic Research 
Associates; Mr. Colin Finkelstein, Chief Financial Officer, EMI Music 
North America; Ms. Andrea Finkelstein, Senior Vice President of 
Business Affairs Operations and Administration, SONY BMG Music 
Entertainment; Mr. Michael Kushner, Senior Vice President, Business and 
Legal Affairs, Atlantic Music Group; Mr. Jerold Rosen, Executive Vice 
President of the Commercial Music Group, SONY

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BMG Music Entertainment; Dr. David J. Teece, the Thomas Tusher Chair, 
Haas School of Business, and Director, Institute of Management, 
Innovation and Organization, University of California at Berkeley; Ms. 
Victoria Bassetti, Senior Vice President of Industry and Government 
Affairs Worldwide and Vice President, Anti-Piracy, North America, for 
EMI Music; Mr. Ronald Wilcox, former Executive Vice President and Chief 
Business and Legal Affairs Officer, SONY BMG Music Entertainment; Mr. 
David Hughes, Senior Vice President of Technology, RIAA; Mr. Glen 
Barros, President and CEO, Concord Music Group; and Mr. David Munns, 
independent music consultant in the United Kingdom, former Vice 
Chairman of EMI Music and CEO of EMI Music North America.
    DiMA presented testimony from the following witnesses: Mr. Eduardo 
(``Eddy'') Cue, Vice President, iTunes; Mr. Alan McGlade, President and 
CEO, MediaNet Digital; Ms. Margaret Guerin-Calvert, Vice Chairman, 
Compass Lexecon and Senior Managing Director, FTI; and Mr. Timothy 
Quirk, Vice President of Music Programming, Rhapsody America.
    The parties' filed written rebuttal statements on April 10, 2008. 
Rebuttal testimony was taken from May 6, 2008, through May 21, 2008. On 
May 15, 2008, the parties informed the Copyright Royalty Judges 
(``Judges'') that they had reached a settlement regarding the rates and 
terms for ``limited downloads and interactive streaming, including all 
known incidental digital phonorecord deliveries.''  See Joint Motion to 
Adopt Procedures for Submission of Partial Settlement at 1 (filed May 
15, 2008).\4\ The parties filed the partial settlement on September 22, 
2008, and it was published in the Federal Register on October 1, 2008, 
73 FR 57033. Public comments were due on October 31, 2008. A single 
comment, filed jointly by CTIA-The Wireless Association and the 
National Association of Broadcasters, was received. See infra at 
Section III.C.
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    \4\ In the motion, the parties requested that the Judges permit 
the parties to submit the settlement on September 15, 2008, or a 
later date set by the Judges, and relieve the parties of their 
obligation to file proposed findings of fact and conclusions of law 
on the settled issues. See Joint Motion to Adopt Procedures for 
Submission of Partial Settlement at 2-3 (filed May 15, 2008). On May 
27, 2008, the Judges denied the parties' request to set a deadline 
for submission of the partial settlement and granted their request 
regarding their obligation to address the settled issues in their 
proposed findings of fact and conclusions of law. See Order Re Joint 
Motion to Adopt Procedures for Submission of Partial Settlement, 
Docket No. 2006-3 CRB DPRA (May 27, 2008). Subsequently, the Judges 
amended their order to provide for a September 22, 2008 deadline for 
the parties to submit their settlement. See Order Setting Deadline 
to File Settlement, Docket No. 2006-3 CRB DPRA (September 17, 2008).
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    DiMA presented the rebuttal testimony of: Ms. Guerin-Calvert; Mr. 
Dan Sheeran, Senior Vice President of Business Development, 
RealNetworks; and Mr. Alexander Kirk, General Manager of Product 
Management, Rhapsody America, LLC.
    RIAA presented the rebuttal testimony of: Mr. David Alfaro, 
Managing Director, FTI Technology Practice; Ms. Terri Santisi, 
President, T. Media Services, International; Mr. Scott Pascucci, 
President, Rhino Entertainment Company, an affiliate of Warner Music 
Group; Dr. Daniel Slottje, Professor of Economics, Southern Methodist 
University and Senior Managing Director, FTI Consulting, Inc.; Mr. 
Bruce Benson, Senior Managing Director, FTI Consulting, Inc.; Ms. 
Finkelstein; Dr. Steven Wildman, James H. Quello Professor of 
Telecommunication Studies and Co-Director of the Quello Center for 
Telecommunications Management and Law, Michigan State University; Mr. 
Mark Eisenberg, Executive Vice President, Business and Legal Affairs, 
in the Global Digital Business Group, SONY BMG Music Entertainment; and 
Mr. Robert Emmer, Chief Operating Officer and co-founder, Shout! 
Factory.
    Copyright Owners presented the rebuttal testimony of: Mr. Faxon; 
Mr. Jeremy Fabinyi, Managing Director of Mechanicals, MCPS-PRS 
Alliance; Dr. Kevin Murphy, George J. Stigler Distinguished Service 
Professor of Economics in the Graduate School of Business and the 
Department of Economics, University of Chicago; Mr. Alfred Pedecine, 
Senior Vice President and Chief Financial Officer, The Harry Fox 
Agency; Dr. Landes; Dr. Ketan Mayer-Patel, Associate Professor, 
Department of Computer Science, University of North Carolina at Chapel 
Hill; and Ms. Judith Finell, President, Judith Finell MusicServices, 
Inc.
    In addition to the written direct statements and written rebuttal 
statements, the Judges heard 28 days of testimony, which filled over 
8,000 pages of transcript. Over 140 exhibits were admitted. The docket 
contains over 340 pleadings, motions and orders.
    On July 2, 2008, after the evidentiary phase of the proceeding, the 
Participants filed their respective Proposed Findings of Fact and 
Conclusions of Law. The Participants filed replies on July 18, 2008. 
Closing arguments occurred on July 24, 2008, after which time the 
record was closed.
    On October 2, 2008, the Judges issued the Initial Determination of 
Rates and Terms. Pursuant to 17 U.S.C. 803(c)(2) and 37 CFR Part 353, 
RIAA filed a motion on October 17, 2008, for rehearing to reconsider 
the timing of the late payment fee of 1.5% per month. At the same time, 
all the parties jointly requested that the Judges ``hold this motion 
for 20 days to allow negotiation by the parties'' because they were of 
the view that they ``may be able to resolve the issues related to the 
timing of the late fee through negotiation, which may obviate this 
motion.'' As part of the joint request, Copyright Owners indicated they 
opposed the rehearing, while DiMA took no position on rehearing. The 
parties' negotiations failed to resolve the issues related to the 
timing of the late fee within the requested 20 days, and nothing 
further was filed on the motion. Having reviewed the motion, the Judges 
denied the motion for rehearing, by Order dated November 12, 2008. As 
reviewed in said Order, none of the grounds in the motion presented the 
type of exceptional case where the Initial Determination is not 
supported by the evidence. 17 U.S.C. 803(c)(2)(A); 37 CFR 353.1 and 
353.2. The motion did not meet the required standards set by statute, 
by regulation and by case law. The motion amounted to no more than a 
rehash of the same arguments the Judges considered and rejected in the 
Initial Determination.

B. Referrals to the Register

    During the course of the proceeding, RIAA and DiMA each sought from 
the Judges referral of a novel question of law to the Register of 
Copyrights (``Register''). RIAA filed its motion prior to the filing of 
written direct statements; DiMA filed its motion prior to the 
presentation of oral testimony in the direct phase of the proceeding. 
In addition, the Judges, sua sponte, referred a material question of 
substantive law to the Register after the close of the record.
1. Ringtones
    In its motion, RIAA sought referral to the Register of a novel 
question of law regarding the eligibility of ringtones for licensing 
under section 115. See Motion of [RIAA] Requesting Referral of a Novel 
Question of Substantive Law (filed August 1, 2006). After considering 
the views of all of the participants, the Judges granted RIAA's motion 
in part and referred to the Register two novel questions of law 
regarding (1) whether ringtones--regardless of whether the ringtone is 
monophonic, polyphonic or a mastertone--constitute delivery of a 
digital phonorecord subject to statutory licensing under section 115 
and (2) if so, what legal conditions and/or limitations

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would apply. See Order Granting in Part the Request for Referral of a 
Novel Question of Law, Docket No. 2006-3 CRB DPRA (August 18, 2006). On 
October 16, 2006, the Register transmitted a Memorandum Opinion to the 
Judges that addressed the novel questions of law, concluding:

    [R]ingtones (including monophonic and polyphonic ringtones, as 
well as mastertones) qualify as digital phonorecord deliveries 
(``DPDs'') as defined in 17 U.S.C. 115. * * * [W]hether a particular 
ringtone falls within the scope of the statutory license will depend 
primarily upon whether what is performed is simply the original 
musical work (or a portion thereof), or a derivative work (i.e., a 
musical work based on the original musical work but which is recast, 
transformed, or adapted in such a way that it becomes an original 
work of authorship and would be entitled to copyright protection as 
a derivative work).

    The Register's Memorandum Opinion was published in the Federal 
Register on November 1, 2006. 71 FR 64303.
2. Interactive Streaming
    DiMA requested referral to the Register of what it described as a 
novel question of law as to whether ``interactive streaming'' 
constituted a DPD under section 115. See Motion of [DiMA] Requesting 
Referral of a Novel Material Question of Substantive Law (``DiMA 
Motion'') (filed January 7, 2008).\5\ Copyright Owners opposed DiMA's 
motion and RIAA took no position on it. The Judges heard oral arguments 
on the motion on January 28, 2008.
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    \5\ DiMA defined ``interactive streaming'' for purposes of its 
requested referral as ``the playing of a specific sound recording in 
response to a listener's request without the creation of an audio 
file that remains accessible on the client computer beyond the 
playing of such sound recording.'' See DiMA Motion at 1 (footnote 
omitted).
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    On February 4, 2008, the Judges denied DiMA's motion, finding that 
the definition of ``interactive streaming'' presented a question of 
fact and not a question of law as required by section 802(f)(1)(B). See 
Order Denying Motion of [DiMA] for a Referral of a Novel Material 
Question of Substantive Law, Docket No. 2006-3 CRB DPRA (February 4, 
2008). We stated:

    During oral argument, there was much discussion regarding the 
term ``interactive streaming.'' The term is neither defined nor 
mentioned in the Copyright Act, and it is apparent that there is not 
agreement among the parties as to the meaning of the term. Given 
these two factors, the Judges determine that there is not a ``novel 
question of substantive law concerning an interpretation of those 
provisions'' of the Copyright Act. 17 U.S.C. 802(f)(1)(B). Rather, 
the matter of what is ``interactive streaming'' is a factual 
question. The Register could not render a determination as to 
whether ``interactive streaming'' is a digital phonorecord delivery 
without inquiring into the factual circumstances and types of 
activities that could be considered ``interactive streaming,'' and 
the extent to which these factual circumstances and types of 
activities result in reproductions of musical works. That is not a 
matter of substantive law as required by the statute.

Order Denying Motion of DiMA at 2. The correctness of our conclusion 
that streaming is not a defined term or behavior was confirmed 
subsequently by the witness testimony. 5/14/08 Tr. at 6594-95 (Kirk) 
(``I mean, one of the wonderful things about computers on the internet 
is they offer you a number of different ways to do things. And 
streaming can encompass a whole range of behaviors.''); see also 5/15/
08 Tr. at 6664-65; 5/21/08 Tr. at 7598 (Mayer-Patel) (``Yes, streaming 
is--is a reasonably broad word and, for the most part, it's generally 
understood to mean making use of data as it arrives as opposed to 
waiting for the entire data to arrive and then making use of it.''). 
The Register also concluded that this matter has many uncertainties.\6\
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    \6\ In announcing her interim rule clarifying the scope and 
application of section 115 as it relates to DPDs, the Register 
stated: It is sufficient to note that the record in this rulemaking 
and the Cartoon Network opinion create sufficient uncertainty to 
make it inadvisable to engage in rulemaking activity based on the 
Office's analysis in the DMCA Section 104 Report. Consequently, the 
interim rule does not address whether streaming of music that 
involves the making of buffer copies, but which makes no further 
copies, falls within the section 115 compulsory license, or whether 
such buffer copies qualify as DPDs. Compulsory License for Making 
and Distributing Phonorecords, Including Digital Phonorecord 
Deliveries: Interim Rule and request for comments. 73 FR 66173, 
66177 (November 7, 2008).
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3. Authority Over Terms
    After closing arguments, the Judges, on their own motion, referred 
to the Register a material question of substantive law concerning the 
division of authority between the Judges and the Register to establish 
terms under the Section 115 statutory license. See Order Referring 
Material Question of Substantive Law, Docket No. 2006-3 CRB DPRA (July 
25, 2008). On August 8, 2008, the Register transmitted a Memorandum 
Opinion to the Judges that addressed the material question of 
substantive law.\7\ See infra at section V.
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    \7\ The Memorandum Opinion was published in the Federal Register 
on August 19, 2008. 73 FR 48396.
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III. The Section 115 License

A. Overview of the License

    Created shortly after the turn of the twentieth century, the 
Section 115 compulsory license represents Congress's first effort to 
balance the exclusive rights of copyright owners with the concern of 
public access to protected works. Despite the almost 100-year history 
of the license, our proceeding marks only the second time that a 
governmental body other than the Congress is establishing the royalty 
rates to be paid for reproductions of musical works by copyright users.
    At the time of Congress's major revision of the copyright laws in 
1909, protection for musical works was a long-recognized concept. The 
protection extended to performances of musical works and to copies of 
sheet music made by songwriters and music publishers. However, the year 
before, the United States Supreme Court decided in White-Smith Music 
Publishing Co. v. Apollo Co., 209 U.S. 1 (1908), that piano rolls did 
not embody a system of notation that could be read and therefore were 
not ``copies'' of musical works within the meaning of the existing 
copyright laws, but rather were merely parts of devices for 
mechanically performing the music. Reacting to this decision, Congress 
extended the protection of musical works to include the right to make 
mechanical devices embodying musical works but without extending the 
protection to the mechanical devices themselves. H.R. Rep. No. 60-2222, 
at 9 (1909). The extension of protection was tempered, however, by a 
concern about monopolistic control of music for recording purposes by 
the makers of piano rolls and phonorecords. The right of a copyright 
owner to mechanical control of his or her musical work was limited by a 
compulsory license once the owner made or authorized the recording of 
his or her musical composition; hence the now common term ``mechanical 
license.'' 17 U.S.C. 1 (1909). Upon payment of a royalty rate of 
2[cent] per ``mechanical,'' any person was free to manufacture and 
distribute a reproduction of a musical work.
    Congress revisited the mechanical license in the 1976 copyright law 
revision, now found in section 115 of title 17 of the United States 
Code, clarifying that the license cannot be invoked unless and until a 
nondramatic musical work embodied in a phonorecord has been distributed 
to the public under authority of the copyright owner (clarifying that a 
demonstration record or tape is not subject to the license); that the 
license is not available for duplicating, without authorization, 
another's sound recording of a musical work; that the license for 
phonorecords is not transferable; and that compulsory licensees are 
granted some latitude in the arrangement of their version of the

[[Page 4513]]

recorded musical work. The Copyright Office was directed to establish 
requirements (terms) for the notice of intention to obtain the section 
115 license, as well as the payment of royalties. These regulations are 
currently found at 37 CFR 201.18 and 201.19. The 2[cent] per 
phonorecord royalty fee adopted under the 1909 Act was retained, but 
the Copyright Royalty Tribunal was instructed to conduct a proceeding 
to adjust the rate. That proceeding is discussed infra at section 
III.B.
    Change came to the section 115 license almost 20 years later \8\ 
with the passage of the Digital Performance Right in Sound Recordings 
Act, Public Law No. 104-39, 109 Stat. 336. Of the amendments made by 
this Act, the most important is extension of the license to ``digital 
phonorecord deliveries,'' which the statute defines as
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    \8\ Congress did make a slight adjustment to section 115 when it 
abolished the Copyright Royalty Tribunal in 1993 by authorizing 
copyright arbitration royalty panels (``CARPs'') to adopt terms--and 
in particular notice and recordkeeping terms--in rate adjustment 
proceedings. Copyright Royalty Tribunal Reform Act of 1993, Public 
Law No. 103-198, 107 Stat. 2304. This authorization was carried 
forward to the Judges upon abolition of the CARP system. Copyright 
Royalty and Distribution Reform Act of 2004, Public Law No. 108-419, 
118 Stat. 2341.

each individual delivery of a phonorecord by digital transmission of 
a sound recording which results in a specifically identifiable 
reproduction by or for any transmission recipient of a phonorecord 
of that sound recording, regardless of whether the digital 
transmission is also a public performance of the sound recording or 
any nondramatic musical work embodied therein. A digital phonorecord 
delivery does not result from a real-time, non-interactive 
subscription transmission of a sound recording where no reproduction 
of the sound recording or the musical work embodied there is made 
from the inception of the transmission through to its receipt by the 
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transmission recipient in order to make the sound recording audible.

17 U.S.C. 115(d). The license now covers digital transmissions of 
phonorecords, in addition to the physical copies, such as compact discs 
(CDs), vinyl and cassette tapes, and, unlike the license for physical 
phonorecords, the license for DPDs is transferable. Congress also 
created a subset of the DPD, the ``incidental digital phonorecord 
delivery'' (``IDPD''), and although it did not define what constitutes 
an IDPD, instructed the Judges to adopt royalty terms and rates that 
distinguish between DPDs and IDPDs.
    In describing this history and structure of the section 115 
license, the Judges note how extensive and detailed is its operation, 
particularly with respect to the regulations adopted by the Copyright 
Office. The complexity of compliance, and the associated transactions 
costs, create a curious anomaly: virtually no one uses section 115 to 
license reproductions of musical works, yet the parties in this 
proceeding are willing to expend considerable time and expense to 
litigate its royalty rates and terms. The Judges are, therefore, 
seemingly tasked with setting rates and terms for a useless license. 
The testimony in this proceeding makes clear, however, that despite its 
disuse, the section 115 license exerts a ghost-in-the-attic like effect 
on all those who live below it. See 5/12/08 Tr. at 5757:10-17 (A. 
Finkelstein). Thus, the rates and terms that we set today will have 
considerable impact on the private agreements that enable copyright 
users to clear the rights for reproduction and distribution of musical 
works.

B. History of the Section 115 Rates

    When Congress created the section 115 license as part of the 1909 
Copyright Act, it set the statutory rate for the making and 
distributing of physical phonorecords at 2[cent] for each musical work 
embodied in the phonorecord. 17 U.S.C. 1(e) (1909). This rate remained 
in effect until Congress revised the copyright laws in 1978, with the 
passage of the 1976 Copyright Act, Public Law No. 94-553, 90 Stat. 
2541. In the 1976 Copyright Act, Congress codified the mechanical 
compulsory license as section 115 and raised the statutory rate to 
2.75[cent] per phonorecord or .6[cent] per minute of playing time or 
fraction thereof, whichever amount was larger. 17 U.S.C. 115(c)(2) 
(1978). Congress also determined that future adjustments of the section 
115 rates would not be set by statute but rather would be made by the 
Copyright Royalty Tribunal (``CRT''), an administrative body created by 
Congress in the 1976 Act to administer all of the compulsory 
licenses.\9\ See H.R. Rep. No. 94-1476, at 111 (1976) (``This rate will 
be subject to review by the [CRT], as provided in section 801, in 1980 
and at 10-year intervals thereafter.''); see also 17 U.S.C. chapter 8 
(1978). With regard to the section 115 license, the CRT was tasked with 
the job of setting ``reasonable'' royalty rates informed by a set of 
four delineated factors. 17 U.S.C. 801(b)(1) (1978). The CRT had no 
authority to set terms for the license; rather, Congress delegated that 
authority to the Register of Copyrights.\10\
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    \9\ At the time the 1976 Copyright Act was enacted, the other 
compulsory licenses were set forth in 17 U.S.C. 111, 116 and 118.
    \10\ Specifically, Congress charged the Register with the 
authority to promulgate regulations governing the notice of 
intention to obtain the section 115 license as well as the monthly 
and annual statements of account. See 17 U.S.C. 115(b)(1) and (c)(3) 
(1978); see also 37 CFR 201.18 (notice of intent to obtain license) 
and 201.19 (statements of account).
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    Pursuant to its statutory directive, the CRT conducted the first, 
and only other, contested proceeding to set rates for the section 115 
compulsory license, which it began in 1980. 45 FR 63 (January 2, 1980). 
The copyright owners were represented by, among others, NMPA and the 
Nashville Songwriters Association International, while the copyright 
users were represented primarily by RIAA. See 46 FR 10466 (February 3, 
1981).
    After taking 46 days of testimony from 35 witnesses which comprised 
over 6,000 pages of transcripts, the CRT issued a lengthy decision in 
which it substantially increased the existing 2.75[cent] rate per 
phonorecord made and distributed to 4[cent] per phonorecord and 
established a complex system for future interim adjustments during the 
7-year license period to reflect increases in the average list price of 
record albums. Id. at 10467, 10485-86. Specifically, the CRT concluded 
``that the application of the statutory criteria [in Section 801(b)(1)] 
to the evidence in this proceeding demonstrates that the mechanical 
royalty rate must be adjusted to either four cents, or three-quarters 
of one cent per minute of playing time or fraction thereof, whichever 
amount is larger.'' Id. at 10485. With respect to future interim 
adjustments, the CRT found ``that any adjustment to the rate should and 
must be directly related to the retail list price of records, now and 
in the future.'' Id.
    The United States Court of Appeals for the District of Columbia 
Circuit upheld the CRT's determination of the rates but set aside the 
CRT's mechanism for adjusting the rates within the licensing period as 
being beyond the CRT's statutory authority. Recording Industry Ass'n. 
of America v. Copyright Royalty Tribunal, 662 F.2d 1 (D.C. Cir. 1981). 
The court remanded the case to the CRT ``for the limited purpose of 
allowing the Tribunal to consider whether it wishes to adopt an 
alternative scheme for interim adjustments.'' 46 FR 55276 (November 9, 
1981). Upon remand, the CRT adopted automatic adjustments to occur in 
1983, 1984 and 1986. By 1986, the rate had been increased to the larger 
of 5[cent] per musical work or .95[cent] per minute of playing time or 
fraction thereof. 46

[[Page 4514]]

FR 66267 (December 23, 1981); see also 37 CFR 255.3(a)-(c).
    The next adjustment of the SECTION 115 rates was scheduled to begin 
in 1987. On March 18, 1987, the CRT received a joint proposal from NMPA 
and SGA, on behalf of the copyright owners, and RIAA, on behalf of 
copyright users, seeking adoption of rates voluntarily negotiated by 
the parties. The settlement, which was ultimately adopted by the CRT, 
set the rate at 5.25[cent] per track beginning on January 1, 1988, and 
established a schedule of rate increases based on the percentage change 
in the CPI every two years over the next 10 years, except that the 
rates would remain the same when the CPI declined and could not be 
increased in any single adjustment by more than 25%. See 52 FR 22637 
(June 15, 1987). Over the ensuing decade, the rate increased until 
1996, when the rate was 6.95[cent] per track or 1.3[cent] per minute of 
playing time or fraction thereof. See 37 CFR 255.3(d)-(h).
    Congress abolished the CRT in 1993 and replaced it with the 
Copyright Arbitration Royalty Panel (``CARP'') system. See Copyright 
Royalty Tribunal Reform Act of 1993, Public Law No. 103-198, 107 Stat. 
2304. The CARPs were to set reasonable rates and, for the first time, 
terms for the section 115 license, subject to review by the Librarian 
of Congress (``Librarian'').\11\
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    \11\ The Register still retained her authority over the notice 
of intention to obtain the license and the monthly and annual 
statements of account.
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    Because the rates set by the CRT pursuant to the 1987 settlement 
were set to expire on December 31, 1997, the year 1997 was a window 
year for adjusting the section 115 rates. The first step in the process 
of adjusting rates under the CARP system was for the Librarian to 
initiate a voluntary negotiation period to allow copyright owners and 
users to negotiate terms and rates of the license. The Librarian set 
the negotiation period to run from July 17, 1996, through December 31, 
1996. 61 FR 37213 (July 17, 1996). The second step of the process was 
to convene a CARP to determine reasonable terms and rates for parties 
not subject to a negotiated agreement. The convening of a CARP was not 
necessary because NMPA, SGA and RIAA were able, after lengthy 
negotiations, to reach an agreement regarding the adjustment of the 
physical phonorecord and digital phonorecord delivery royalty rates. 
Under the settlement, which was ultimately adopted by the Librarian, 
the rate for physical phonorecords was set at 7.1[cent] per track 
beginning on January 1, 1998, and a schedule was established for fixed 
rate increases every two years over the next 10-year period with the 
rate beginning on January 1, 2006, being the larger of 9.1[cent] per 
track or 1.75[cent] per minute of playing time or fraction thereof. See 
37 CFR 255.3(i)-(m); see also, 63 FR 7288 (February 13, 1998). The 
rates adopted for digital phonorecord deliveries for the 10-year period 
were the same as those set for physical phonorecords, and the rates for 
incidental DPDs were deferred until the next scheduled rate proceeding. 
See 37 CFR 255.5, 255.6; see also, 64 FR 6221 (February 9, 1999). These 
rates for physical and digital phonorecords are still in effect.

C. The Parties' Settlement of Rates and Terms for Conditional 
Downloads, Interactive Streaming and Incidental Digital Phonorecord 
Deliveries

    During the latter stages of the rebuttal hearings, counsel for 
Copyright Owners, RIAA and DiMA advised the Judges that they had 
reached a global settlement with respect to limited downloads, 
interactive streaming, and ``all known incidental DPDs.'' Copyright 
Owners PFF at ] 199. The parties announced their intention to file 
their settlement just a short period of time before the October 2 
deadline for the Judges' initial determination, expressing concern that 
it might influence our decision with respect to physical phonorecords, 
downloads and ringtones, and finally did so after we issued an Order 
compelling them to submit the settlement no later than noon on 
September 22, 2008. Order Setting Deadline to File Settlement, Docket 
No. 2006-3 CRB DPRA (September 17, 2008). Upon receipt of the agreement 
and pursuant to 17 U.S.C. 801(b)(7)(A), we published it in the Federal 
Register. See, 73 FR 57033 (October 1, 2008).\12\ No objections were 
filed by any of the participants to the proceeding. A joint comment was 
received from CTIA--The Wireless Association and the National 
Association of Broadcasters arguing that adoption of the settlement is 
beyond the Judges' authority, contrary to law and bad policy.
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    \12\ We are making two technical amendments in the regulatory 
text of this final rule to correct two errors that appeared in the 
proposed regulatory text. Both corrections are in Sec.  385.13 of 
title 37 of the Code of Federal Regulations. In the second sentence 
of Sec.  385.13(a)(1), the reference to Sec.  385.12(b)(1) is 
changed to Sec.  385.12(b)(3); and in the first sentence of Sec.  
385.13(a)(2), the reference to Sec.  385.12(b)(3) is changed to 
Sec.  385.12(b)(1).
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    Our jurisdiction with respect to the settlement is clear. Section 
801(b), entitled ``FUNCTIONS'' of the Copyright Royalty Judges, sets 
forth our responsibilities in eight specific subsections. Subsection 
(7)(A) directs us:

    To adopt as a basis for statutory terms and rates or as a basis 
for the distribution of statutory royalty payments, an agreement 
concerning such matters reached among some or all of the 
participants in a proceeding at any time during the proceeding, 
except that--
    (i) the Copyright Royalty Judges shall provide to those that 
would be bound by the terms, rates, or other determination set by 
any agreement in a proceeding to determine royalty rates an 
opportunity to comment on the agreement and shall provide to 
participants in the proceeding under section 803(b)(2) that would be 
bound by the terms, rates, or other determination set by the 
agreement an opportunity to comment on the agreement and object to 
its adoption as a basis for statutory terms and rates; and
    (ii) the Copyright Royalty Judges may decline to adopt the 
agreement as a basis for statutory terms and rates for participants 
that are not parties to the agreement, if any participant described 
in clause (i) objects to the agreement and the Copyright Royalty 
Judges conclude, based on the record before them if one exists, that 
the agreement does not provide a reasonable basis for setting 
statutory terms or rates.

17 U.S.C. 801(b)(7)(A). Thus, we are mandated to adopt the 
determination of the settling parties to a distribution and rate 
proceeding. If it is a rate proceeding (but not a distribution 
proceeding), we must afford those who would be bound by the settled 
rates and terms, but are not parties to the proceeding, an opportunity 
to comment and we must afford the parties to the proceeding an 
opportunity to object to the settlement. The comments received from 
non-parties have no bearing on the outcome since the statute does not 
grant us authority to reject or amend the settlement on that basis. 
Only if an objection is received by one or more of the parties are we 
given any discretion over the settlement, and then we are limited to 
rejecting it if we determine that the settlement ``does not provide a 
reasonable basis for setting statutory rates and terms.'' Id.\13\ 
Chapter 8 of the Copyright Act encourages settlements among the 
parties. The procedure in section 803 incorporates mandated settlement 
negotiations.
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    \13\ The requirement that a rate settlement must be offered for 
public comment without consequence is curious but apparently 
intentional. Only parties to a proceeding have a voice in whether 
the settlement is adopted, an apparent effort to encourage those who 
will be bound by the rates and terms of a proceeding to actively 
engage in the proceeding rather than sit on the sidelines and 
attempt to later seek to influence the outcome. There is no 
legislative history on this point.
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    In the present case and as noted above, we have published the 
settlement in the Federal Register. Unsurprisingly, none of the parties 
have objected.

[[Page 4515]]

Therefore, we have no choice but to adopt it as the basis for the 
necessary statutory rates and terms applicable to the corresponding 
licensed activities.\14\ In doing so, we observe that the provisions of 
the settlement do not constitute a finding of fact or a resolution of 
law by us. The statute provides that the settlement is an adjustment of 
rates and terms by the parties that we must adopt. We emphasize this 
statutory distinction to clarify the procedure applicable to the 
settlement. The provisions of 17 U.S.C. 802(f)(1)(D) permit the 
Register of Copyrights to review material questions of substantive law 
that are resolutions that are part of our final determination; however, 
inasmuch as the settlement does not represent a resolution of the 
Judges, the Register's review is not part of the procedure applicable 
to the relevant rates and terms established by this settlement.\15\
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    \14\ The Joint Comment of CTIA-The Wireless Association and the 
National Association of Broadcasters argues that the Judges ``may 
not adopt a rule that is contrary to law, regardless of whether or 
not the parties to the proceeding may agree.'' Joint Comment at 6. 
As discussed above, the statute provides that the Judges adopt 
settlements, except when specific conditions occur. By adopting a 
settlement when these conditions are absent, the Judges are adopting 
a regulation that follows the law. Further review of settlements as 
proposed in the Joint Comment will require amendments to 17 U.S.C. 
801(b)(7)(A). As the Joint Comment suggests, it may be good public 
policy for the Judges to have discretion to decide if the terms of a 
settlement should be adopted. Had CTIA-The Wireless Association and 
the National Association of Broadcasters participated in this 
proceeding, their objections to the settlement and proposed 
revisions may have been the basis for considering the merits of the 
settlement.
    \15\ In her review of substantive questions of material law in 
Docket Nos. 2005-5 CRB DTNSRA and 2006-1 CRB DSTRA, the Register 
concluded that it was legal error for the Judges not to set forth a 
standalone rate for the section 112 license for preexisting 
subscription services and new subscription services. 73 FR 9143 
(February 19, 2008). The rates and terms for these services, 
however, were adopted pursuant to settlements of the parties under 
section 801(b)(7)(A) and were not a final determination of the 
Judges. See, 73 FR at 9145 (Register does not address the statutory 
limitations imposed on the Judges with regard to settlements in 
merely stating, without more, that: ``The Copyright Royalty Judges 
have authority to accept or reject the settlement and it is the 
resulting Final Order which is then subject to review by the 
Register'').
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IV. Determination of Royalty Rates

A. Application of Section 115

    Based on the applicable law and relevant evidence received in this 
proceeding, the Copyright Royalty Judges must determine rates for the 
section 115 musical works reproduction licenses utilized by record 
companies and other music distributors in the distribution of 
phonorecords of such works.
    The Copyright Act requires that the Copyright Royalty Judges 
establish rates for the section 115 license that are reasonable and 
calculated to achieve the following four specific policy objectives: 
(A) To maximize the availability of creative works to the public; (B) 
to afford the copyright owner a fair return for his creative work and 
the copyright user a fair income under existing economic conditions; 
(C) to reflect the relative roles of the copyright owner and the 
copyright user in the product made available to the public with respect 
to relative creative contribution, technological contribution, capital 
investment, cost, risk, and contribution to the opening of new markets 
for creative expression and media for their communication; and (D) to 
minimize any disruptive impact on the structure of the industries 
involved and on generally prevailing industry practices. 17 U.S.C. 
115(c) and 17 U.S.C. 801(b)(1).
    Having carefully considered the relevant law and the evidence 
received in this proceeding, the Copyright Royalty Judges determine 
that the appropriate section 115 license rate is the greater of 
9.1[cent] per song or 1.75[cent] per minute of playing time (or 
fraction thereof) for physical phonorecord deliveries and for permanent 
digital downloads; and, further, that the appropriate Section 115 
license rate is 24[cent] for ringtones. Section 803(d)(2)(B) governs 
the effective date of the rates established in this proceeding.
    The applicable rate structure for the section 115 license is the 
starting point for the Copyright Royalty Judges' determination.

B. The Rate Proposals of the Parties and the Appropriate Royalty 
Structure for Section 115 Licenses

1. Rate Proposals
    The contending parties propose several different rate structures. 
In its second amended rate proposal, RIAA offers a percentage of 
wholesale revenues approach as its preferred alternative, with a rate 
of 9% of all-in wholesale revenues applicable to physical product and 
permanent downloads and a rate of 15% of all-in wholesale revenues 
applicable to ringtones. As its less preferred alternative, RIAA 
proposes a ``penny-rate'' ranging from 3.6[cent] per track to 
9.45[cent] per track depending on the corresponding level of wholesale 
price associated with the track for tracks reproduced on physical 
product or as permanent downloads. As part of this alternative 
approach, RIAA proposes a separate rate of 18[cent] per ringtone. RIAA 
Second Amended Rate Proposal (July 2, 2008) at 1-6.
    DiMA offers a second amended rate proposal applicable only to 
permanent downloads that is formulated as a ``greater of'' comparison 
between 6% of applicable receipts and 4.8[cent] per track for singles 
or 3.3[cent] per track for tracks sold as part of bundles. DiMA Second 
Amended Rate Proposal (July 2, 2008) at 3.
    By contrast, the Copyright Owners' second amended rate proposal 
presents only a ``penny-rate'' choice for physical product and 
permanent downloads, equal to the greater of 12.5[cent] per song or 
2.4[cent] per minute of playing time for physical product and the 
greater of 15[cent] per track or 2.9[cent] per minute of playing time 
for permanent downloads. These penny rates would be additionally 
subject to a ``periodic'' adjustment ostensibly to reflect the change 
in the consumer price index (CPI-U) over such period. However, in the 
case of ringtones, Copyright Owners propose a tri-partite ``greater 
of'' comparison between (1) 15% of all revenue received in conjunction 
with the licensed product or service; (2) 33.3% of the total content 
costs paid for mechanical rights to musical compositions and rights to 
sound recordings; and (3) 15[cent] per ringtone subject to periodic 
adjustments for inflation as measured by the consumer price index (CPI-
U) over such period. Copyright Owners' Second Amended Rate Proposal 
(July 2, 2008) at 1-2.
2. Rate Structure
    From the evidence of record, the Copyright Royalty Judges conclude 
that several factors tip the scales in favor of a usage fee structure 
for those licenses for which contested proposals have been submitted by 
the parties. First, unlike our recent determination in the SDARS 
proceeding, here we are not faced with difficult or intractable 
problems in measuring usage nor do we find that a percentage of revenue 
approach provides the most efficient mechanism for capturing the value 
of the reproduction and distribution rights at issue here. See 73 FR at 
4085-4087. Second, although not presenting as many of the same problems 
as the proposed revenue-based metrics in Webcaster II (see 72 FR at 
24088-24090), we conclude that the evidence in the record here is that 
enough difficulties remain with the revenue-based proposals submitted 
by the parties to determine that it is more reasonable to adopt a 
usage-based fee structure for the licenses still at issue in this 
proceeding.

[[Page 4516]]

    In the instant proceeding, measuring usage is straightforward. Each 
reproduction of the musical work on a physical CD (or some other older 
physical format such as cassette tapes or vinyl LPs), a permanent 
digital download or a digital ringtone counts as a use of the musical 
work. No proxies need be formulated to establish the number of such 
reproductions. They are readily calculable as the number of units in 
transactions between the parties. See 2/7/08 Tr. at 2173-4 (Landes). 
Such ease of calculation with respect to usage was not observed by the 
Judges in the SDARS proceeding.\16\ Indeed, in the SDARS proceeding, 
the best the parties could offer were ``per play'' and ``per 
broadcast'' alternatives that were problematic proxies for a usage 
metric. Adjustments aimed at improving the ``per play'' and ``per 
broadcast'' proposals in that proceeding resulted in additional 
ambiguities rather than more precision. See 73 FR at 4085-4087. In the 
instant case, measuring the quantity of reproductions presents no such 
problems. This ease of application offers an efficiency in valuing the 
rights at issue not available under the percentage of revenue 
alternatives offered by the parties in this proceeding.
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    \16\ In the SDARS proceeding, the Judges concluded that: 
``Indeed, in stark contrast to the record in Webcaster II, neither 
the SDARS nor SoundExchange provided substantial evidence to 
indicate that a true per performance rate was susceptible of being 
calculated by the parties to this proceeding. Therefore, we find 
that a revenue-based measure is currently the most effective proxy 
for capturing the value of the performance rights at issue here, 
particularly in the absence of any substantial evidence of how some 
readily calculable true per performance metric could be applied to 
the SDARS.'' 73 FR 4087.
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    In contrast to the ease of applying a usage metric in this 
proceeding, some of the difficulties associated with a percentage of 
revenue approach cited in Webcaster II are also discernible in the 
instant matter. In Webcaster II, we concluded that the evidence in the 
record of that proceeding weighed in favor of a per performance usage 
fee structure for both commercial and noncommercial webcasters, but we 
further suggested that, in the absence of some of the more egregious 
problems noted therein, the use of a revenue-based metric as a proxy 
for a usage-based metric might be reasonable. Webcaster II, 72 FR at 
24090. Unfortunately, at least some of the same salient difficulties 
associated with a percentage of revenue approach in Webcaster II appear 
in this proceeding as well.
    In particular, one of the more intractable problems associated with 
the revenue-based metrics proposed by the parties in Webcaster II, 72 
FR at 24090, was the parties' strong disagreement concerning the 
definition of revenue for certain services. This was further 
complicated by questions related to applying the same revenue-based 
metric to noncommercial as well as commercial services. See Webcaster 
II, 72 FR 24094 at n.15. Although the same degree of difficulty is not 
presented by the applicable facts in this proceeding,\17\ yet some 
similar difficulties remain. For example, even in those cases where 
opposing parties to this proceeding proposed a revenue-based metric, 
there were important differences and disagreements related to the 
definition of revenues in their proposals. Compare Copyright Owners PFF 
at ]] 610, 614-22, Copyright Owners RFF at ] 667 and DiMA PFF at ]] 
219-220, 237-9, DiMA RFF at ]] 105, 113-4, DiMA RCL ] 39 and RIAA PFF 
at ]] 1603-4, 1620-2, 1628-9, 1632-47, 1650, 1653, 1655, 1663-4, RIAA 
PCL at ] 182-3, RIAA RFF at ]] 457, 462-5.
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    \17\ For example, accounting differences between for-profit 
entities and not-for-profit entities are not an issue in the instant 
proceeding. Similarly, in contrast to commercial webcasting, 
identifying relevant user revenues here does not appear to be as 
complex across the spectrum of potential mechanical license users as 
doing so for a number of commercial webcasters (such as some 
simulcasters) who offer features and formats either unrelated to 
music or who only partially employ music as part of their 
programming. See Webcaster II, 72 FR at 24089.
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    Moreover, while such differences may be surmountable for some 
formats, in the case of the physical formats and permanent digital 
downloads that account for the overwhelming bulk of mechanical license 
use at issue in this proceeding, the parties have until now lived under 
a penny-rate standard not a revenue-based regime. Therefore, the 
parties are less familiar with the operation of a revenue-based metric. 
The value of such familiarity lies in its contribution towards 
minimizing disputes and, concomitantly, constraining transactions 
costs.\18\ Therefore, the absence of such familiarity with respect to 
the large majority of transactions at issue in this proceeding may well 
give rise to higher transactions costs, stemming from the greater 
likelihood of disputes over component definitions of revenue. 
Continuing the familiar penny-rate system will avoid such disputes.
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    \18\ In addition, auditing and enforcement costs are likely to 
be lower. Fewer data elements are required to be collected and 
reviewed under the existing penny-rate system as compared to a 
revenue-based metric. Copyright Owners PFF at ]] 595-596 and 648.
---------------------------------------------------------------------------

    In addition, some higher costs to Copyright Owners will be avoided 
by leaving publisher-songwriter contracts structured on a penny-rate 
system, and not having to modify them to accommodate a revenue-based 
structure. 5/14/08 Tr. at 6427-37 (Faxon).
    RIAA's shrill contention that a penny-rate structure ``would be 
disruptive as consumer prices continue to decline'' and should, 
therefore, be replaced by a percentage rate system in order to satisfy 
801(b) policy considerations related to the minimization of disruption 
(see, for example, the RIAA contention summarized in RIAA PFF at ] 
1478) is not supported by the record of evidence in this proceeding. As 
the Judges indicated in the SDARS proceeding, ``disruption'' typically 
refers to an adverse impact that is substantial, immediate and 
irreversible in the short-run because there is insufficient time for 
the industry participants to adequately adapt to the changed 
circumstances and, as a consequence, such adverse impacts threaten the 
viability of the music delivery currently offered under the license in 
question. See 73 FR at 4097. In the instant proceeding RIAA offers no 
persuasive evidence of a causal relationship between any specified past 
level of record industry revenue shortfalls and the structure (as 
distinguished from the amount) of this one component of industry 
expenses (as distinguished from several other major cost components) 
over the same period. Nor does the RIAA offer any persuasive evidence 
that would in any way quantify any claimed adverse impact on projected 
future revenues stemming from the continued application of a penny-rate 
structure over the course of the license period in question.
    Then too, RIAA's and DiMA's asserted claims of the relative 
advantage of their proposed revenue-based structures fail to adequately 
consider negative impacts on copyright owners. For example, RIAA's 
claim that a pure percentage rate allows more pricing flexibility than 
a penny rate appears exaggerated and unfairly ignores the disadvantages 
of the pure percentage rate for copyright owners. RIAA contends that 
``With a fixed cents rate, record companies cannot lower their prices 
below a certain threshold without losing the margin needed to cover 
their very significant costs.'' (See this RIAA contention in RIAA PFF 
at ] 1503). Yet the record of evidence in this proceeding does not 
identify such a threshold, but rather indicates that even under the 
current penny rate the record companies have been able to reduce 
prices. See, for example, 5/14/08 Tr. at 6425-26 (Faxon); 2/12/08 Tr. 
at 2683 (Firth); 2/5/08 Tr. at 1666-7 (Peer); 2/14/08 Tr. at 3376, 
3379-80 (A.

[[Page 4517]]

Finkelstein). Record companies may have other costs such as overhead 
that also could serve as the source for further potential price 
reductions.\19\ Copyright Owners PFF at ]] 422-23. Moreover, this 
purported business flexibility ``advantage'' raises serious questions 
of fairness precisely because the percentage of revenue metric may be a 
less than fully satisfactory proxy for measuring more usage or the 
actual intensity of the usage of the rights in question.\20\ Copyright 
Owners RCL at ] 132. It is not fair to fail to properly value the 
reproduction rights at issue in this proceeding. Such a result is at 
odds with the stated policy objective of the statute to afford the 
copyright owner a fair return for his creative work. 17 U.S.C. 
801(b)(1).
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    \19\ It is also not clear from the record of evidence how much 
of record company costs savings have been translated into consumer 
price reductions and how much have been retained by the companies in 
order to preserve profit margins.
    \20\ DiMA's offer of a dual minimum penny rate (i.e., with two 
different minima for stand-alone tracks and bundled tracks) as part 
of its percentage-based proposal ostensibly aims to mitigate this 
adverse effect in exchange for less than full flexibility. Thus, the 
DiMA proposal adds the complexity and costs of multiple 
measurements, but does not offer persuasive evidence that such costs 
are reasonably incurred relative to the more modest potential 
benefits to users (i.e., some price flexibility although less than 
full flexibility) and owners (i.e., no zero payments for use of 
additional musical work although differential payments for use of 
same work still possible) flowing from its proposed rate structure.
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    At the same time, DiMA contends that the adoption of a percentage 
rate structure would increase their incentives to invest more in the 
quality and breadth of their offerings and therefore expand the 
availability of works to the public consistent with the first of the 
four policy objectives of 801(b). See, for example, DiMA PFF at ]] 216, 
219. However, these contentions are related to the amount of revenue 
(net of the payment of a specific amount of mechanical license fees) 
that would remain to DiMA members irrespective of the structure of the 
rate. (``But this advantage will be realized only if the percentage 
rate is not set so high (or accompanied by unreasonably high `minima') 
that it discourages technological experimentation.'' DiMA PFF at ] 216, 
emphasis added. ``A percentage rate can promote technological 
investment and innovation, and thereby expand the availability of works 
to the public, only if the revenue base is not overly broad.'' DiMA PFF 
at ] 219, emphasis added.) Therefore, so far as the structure of the 
rate is concerned, there is nothing novel in these additional DiMA 
contentions that set them apart from the business flexibility arguments 
previously discussed above and found wanting.
    For all of the above reasons, we are persuaded that the penny-rate 
structure provides a better measure of actual usage than the 
alternatives proposed by parties in this proceeding and that the 
application of the penny-rate structure to all the licenses in 
contention in this proceeding will result in fewer overall transaction 
cost issues over the course of the license period compared to the 
proffered alternatives.\21\ While the problems identified above for a 
revenue-based proxy for usage may be remedied in the future by the 
parties in light of evolving circumstances, the parties' proposals in 
this proceeding do not offer a sufficient basis upon which to determine 
that a revenue-based alternative is a reasonable alternative to the 
penny rate for the licenses at issue in this proceeding.
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    \21\ While both Copyright Owners and RIAA have proposed a 
revenue-based alternative for compensating ringtones and while some 
ringtone agreements in the record offer revenue-based compensation 
as one alternative in a ``greater of'' formulation, Copyright Owners 
and RIAA have not shown whether or how those agreements have 
overcome the hereinabove described problems with the parties' 
revenue-based proposals. Therefore, in light of the efficiency of 
administration gained from a single structure when spread over the 
much larger number of musical works reproduced as physical 
phonorecords or digital permanent downloads as compared to ringtones 
and the fact that both Copyright Owners and RIAA have also proposed 
a penny-rate alternative for ringtones, the Judges determine that a 
single penny-rate structure is best applied to ringtones as well as 
physical phonorecords and digital permanent downloads.
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C. The Section 115 Royalty Rates

    Chapter 8 and section 115 of the Copyright Act require the Judges 
to determine reasonable rates and terms of royalty payments for the 
activities specified by section 115 of the Copyright Act. 17 U.S.C. 
115(c)(3)(C). The rates the Judges establish under section 115 of the 
Copyright Act must be calculated to achieve the objectives set forth in 
section 801(b)(1)(A) through (D) of that Act. Moreover, in establishing 
rates and terms under section 115, the Judges may consider voluntary 
license agreements described in subparagraphs (B) and (C) of section 
115(c)(3). See 17 U.S.C. 115(c)(3)(D).
    The parties in the proceeding agree that in determining reasonable 
rates, market benchmarks can be a useful starting point. RIAA PCL at ] 
26 (although ``royalty rates set in this proceeding need not be market 
rates * * * market benchmarks can be a very useful starting point''); 
Copyright Owners PCL at ] 26, quoting SDARS Determination 
(``determination of a reasonable mechanical rate should `begin with a 
consideration and analysis of [marketplace] benchmarks and testimony 
submitted by the parties, and then measure the rate or rates yielded by 
that process against the statutory objectives' of Section 801(b). 
[M]arketplace benchmarks are critical to the identification of `the 
parameters of a reasonable range of rates within which a particular 
rate most reflective of the four 801(b) factors can be located.' ''); 
DiMA PCL at ] 73 (``[t]he statutory objectives help to determine a 
`range of reasonable royalty rates' along with various potential 
benchmarks from which the Court is free to make a judgment about how 
best to proceed,'' quoting Recording Industry Assoc. of America v. 
Copyright Royalty Tribunal, 662 F.2d 1, 9 (DC Cir. 1981)).
    As discussed below, however, the parties disagree about what 
constitutes the most appropriate benchmark to guide the Judges in 
determining a reasonable rate. Moreover, the parties do not limit their 
offer to benchmarks for similar products drawn from a marketplace in 
which buyers and sellers are similarly situated, but rather offer a 
variety of negotiated rates, legislated rates, and previously 
determined rates as proposed benchmarks. These various proffered 
benchmarks are described and discussed below.
1. Copyright Owners' Proposed Benchmarks
    Copyright Owners argue that the most appropriate benchmarks, as 
proffered by their expert economist, Dr. Landes, are: (1) Licenses for 
mastertones; \22\ (2) licenses for synchronization rights; and (3) the 
royalty structure of the Audio Home Recording Act (``AHRA''). 17 U.S.C. 
1001-1010. These benchmarks are proffered to support royalty rates 
applicable to several types of uses of the section 115 compulsory 
license.
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    \22\ A ringtone is a digital audio file that is downloaded to a 
mobile phone or similar portable device to personalize the ring that 
alerts the consumer to an incoming call or message. Monophonic 
ringtones contain only a musical work's melody (or a portion of the 
melody). Polyphonic ringtones contain a musical work's melody and 
harmony (or a portion thereof). Mastertones are ringtones that are 
extracted from digital sound recordings. Mastertone sellers must 
acquire rights to both the musical work and the sound recording. 
Copyright Owners PFF at ] 492. Although the Register has determined 
that certain ringtones qualify as DPDs as defined in section 115, 
``[t]he vast majority of the ringtone and mastertone licenses 
reviewed by Dr. Landes predated the [Register's] Ringtone Opinion.'' 
Copyright Owners PFF at ] 492.
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a. Proposed Mastertone Benchmark
    With respect to mastertones, economic expert Dr. Landes found that 
Copyright Owners entered into

[[Page 4518]]

agreements with two different groups consisting of: (1) Third-party 
sellers of ringtones (ie., aggregators or cellular telephone companies) 
and (2) record companies. The agreements with the third-party sellers 
typically provided for royalty payments for the musical works 
reproduction at the greater of (1) a per-mastertone penny-rate minimum; 
(2) a percentage of retail price of the mastertones; or (3) a 
percentage of gross revenue. Copyright Owners PFF at ] 494. The penny 
rate minimums for such agreements ranged from 10 cents to 25 cents, 
with an average of 12.5 cents. Id. at ] 495. Retail price percentages 
ranged from 10% to 15%, with an average of 10.5%. Id. at ] 496. Stated 
gross revenue percentages ranged from 9% to 20%. Id. at ] 497.\23\
---------------------------------------------------------------------------

    \23\ Dr. Landes reviewed and relied upon nearly 200 third-party 
agreements from six different music publishers spanning the years 
2004, 2005, and 2006. Copyright Owners PFF at ] 494. The Copyright 
Owners proposed no factual findings with respect to the 
sophistication or lack thereof of the publishers or the third-party 
sellers.
---------------------------------------------------------------------------

    Ringtone agreements between Copyright Owners and record companies 
have taken the form of either a (1) ``New Digital Media Agreement'' 
(``NDMA''), covering, among other rights, the licensing of musical 
compositions for use in mastertones; or (2) standalone licenses for 
mastertones only. Id. at ] 498. The NDMAs specified a tiered royalty 
rate for mastertones under which record companies agreed to pay a fee 
equal to the greater of 10 cents, 10% [of the retail price of the 
mastertone sold], or 20% of the wholesale price of each mastertone 
sold. Copyright Owners PFF at ] 500.
    According to Copyright Owners, mastertones have typically been sold 
at retail prices of $1.99 or more, and music publishers have therefore 
been paid on a percentage of revenue rather than the minimum penny 
rate. Actual payments have ranged from 16 cents to 25 cents per 
mastertone.\24\ Copyright Owners PFF at ] 503. Dr. Landes concludes 
that Copyright Owners typically acquire 20% of the total amount paid 
for compositions and sound recordings in the mastertone market. 
Copyright Owners PFF at ] 491.
---------------------------------------------------------------------------

    \24\ Dr. Landes stated that one company commonly licenses its 
recordings for a flat rate, ranging in its agreements from $1.00 to 
$1.35. Twenty percent of those wholesale rates yields a range of 20 
cents to 27 cents per mastertone sold.
---------------------------------------------------------------------------

    RIAA expert economist Dr. Wildman maintains that the NDMAs provide 
a blanket license, ``which is a significant benefit to record companies 
because it avoids the complexities and administrative burden of 
individual license negotiations. In contrast, the compulsory license is 
a burdensome, song-by-song licensing process with the burdens falling 
primarily on the record companies.'' Wildman WRT at ] 46. Nevertheless, 
Copyright Owners represent that standalone mastertone licenses, 
presumably with record companies rather than third-party sellers, that 
postdate the NDMAs have identical rates as those contained in the 
NDMAs. Copyright Owners PFF at ] 502.
    In addition, prior to the November 2004 execution date for the 
NDMAs, certain non-record company mastertone sellers obtained 
mastertone licenses under which the sellers of the mastertones agreed 
to pay music publishers the greater of 15 cents or 10% of retail 
revenue per mastertone. Copyright Owners PFF at ] 501. However, 
Copyright Owners contend that the rates in the NDMAs ``were 
consistent'' with these earlier agreements. Id. They refrain from 
offering an explanation for the 33% drop in the minimum penny rate from 
the earlier agreements to the NDMAs that could well be due to increased 
bargaining power of the major record companies compared to the earlier 
mastertone sellers (e.g., Opera Telecom), the maturing of the 
mastertone market, or a combination of these and other factors. Without 
some credible explanation for the differences between the two sets of 
agreements, we cannot agree with the Copyright Owners' assessment that 
these rate structures are fully consistent.
    Copyright Owners concede that a ``relatively small number of songs 
account for the bulk of mastertone revenue,'' but contend that the 
mastertone market mirrors the music industry as a whole, which, 
according to Copyright Owners, is ``hit-driven.'' Copyright Owners PFF 
at ] 513. Perhaps as a result of these contentions, Copyright Owners 
offer no adjustment to the proposed mastertone benchmark to align it to 
the market for CDs or downloads.\25\
---------------------------------------------------------------------------

    \25\ RIAA's expert economist Dr. Wildman contends that not only 
would an adjustment of the mastertone benchmark be required to align 
it with the market for CDs and downloads but one would also be 
required to align the mastertone benchmark with the market for 
mastertones. See Wildman WRT at 44-52 (citing the fact that NDMAs 
include interdependent rights in addition to mastertone use). Dr. 
Wildman concludes, however, that the adjustment of the mastertone 
rate to derive a rate for CDs and downloads ``is all but impossible 
to make * * * with any real level of confidence.'' Wildman WRT at 
46.
---------------------------------------------------------------------------

    While the proposed mastertone benchmark certainly offers valuable 
rate evidence from the marketplace \26\ for one of the types of 
products covered by the Section 115 license that is the subject of this 
proceeding (i.e., ringtones), it is much less persuasive when that 
benchmark is applied to the other products at issue in this proceeding 
(i.e., CDs and permanent downloads) that are, at best, only in small 
part similar in nature and ultimate consumer use. For example, although 
CDs and permanent downloads may be easily perceived as substitutes by 
consumers, it is unlikely that consumers would regard a CD as a very 
good substitute for a mastertone or vice-versa. In short, we find that 
although substantial empirical evidence shows that sound recording 
rights are paid similar multiple times the amounts paid for musical 
works rights in most ringtone markets, that proposed benchmark evidence 
is far from dispositive of what the size of that multiple might be for 
other types of products such as CDs and permanent downloads.\27\ While 
similar sellers and sometimes even similar buyers might be participants 
in both the proposed benchmark ringtone market and the target CD and 
permanent download markets, the benchmark and target markets differ 
significantly in terms of the ultimate product consumed.
---------------------------------------------------------------------------

    \26\ The record of evidence is that mastertones have 
substantially displaced monophonic and polyphonic ringtones in the 
current marketplace. Rosen WDT at 5; RIAA Ex. 102-RR at Figure 2.
    \27\ It is clear from their offer of a range of relative values, 
bounded on the low end by their ringtone benchmark and on the high 
end by their synch market benchmark, that even Copyright Owners must 
recognize that their relative value of music content benchmark 
evidence varies with the particular benchmark markets they have 
selected. This is not surprising, given the different use to which 
the ultimate consumer product in these markets is put and, 
therefore, given the relative difference in importance that each 
respective input plays in shaping the nature of the differing output 
in each of the respective markets in question. In some markets, a 
specific sound recording by a particular artist is simply more 
important to the consumers of the ultimate product than in others, 
so that its relative value compared to that of the underlying 
musical work is higher than it might be in other markets. This is 
further underlined by the Copyright Owners' proposals for different 
shares of content costs varying by product market (e.g., 33% of 
content costs for ringtones compared to equivalent of 20% for 
permanent downloads).
---------------------------------------------------------------------------

b. Proposed Synch License Benchmark
    With respect to synch licenses, Copyright Owners represent that 
they typically receive one-half of the total licensing fees paid by 
licensees who wish to use a sound recording in an audiovisual work. 
Copyright Owners PFF at ] 531. To use a sound recording in an 
audiovisual work, such as a film, television show or commercial, a 
licensee must obtain a ``synchronization'' (or ``synch'') license for 
the underlying musical composition as well as a ``master use'' license 
for the

[[Page 4519]]

sound recording, neither of which is subject to a compulsory license. 
Copyright Owners PFF at ] 532. Synch licenses and master use licenses 
typically contain ``most favored nation'' provisions, which state that 
if a licensee acquires one of the two necessary rights and subsequently 
agrees to pay the licensor of the other necessary right more than it 
paid the first, the licensee will be obligated to increase 
retroactively the fee paid to the first party. Copyright Owners PFF at 
] 534. The presence of most favored nation provisions in typical synch 
license agreements may effectively dictate that the fees paid to music 
publishers for synch rights walk in lockstep with those paid to record 
companies for master use rights. See Copyright Owners PFF at ] 535. 
Even assuming that the differences in the market for synch rights and 
that for CDs, downloads, and ringtones could be reconciled, it is 
difficult to see what useful information could be gleaned about the 
value of a compulsory license to make and distribute a phonorecord from 
the relative value of two licenses that a prospective licensee must 
obtain to use a particular recording in an audio-visual work where 
obtaining those licenses is predicated on the licensee paying each of 
the licensors an equal share of royalties.
    Copyright Owners represent that there are tens of thousands of 
synchronization transactions completed each year. Id. at ] 533. They do 
not, however, proffer proposed factual findings relating to the 
percentage of songs recorded in a particular year that might be the 
subject of a synch license. Moreover, Copyright Owners do not proffer 
evidence that would allow the Judges to generalize about the relative 
bargaining power of licensees and licensors in the benchmark market as 
compared to the target market.
    At bottom, the consumer products from which demand is derived for 
music inputs are clearly not comparable in the proposed benchmark 
market and the target market.\28\ No benchmark adjustments are 
proffered to remedy this shortcoming. Therefore, we do not find the 
proposed synch license benchmark to be of any meaningful value.
---------------------------------------------------------------------------

    \28\ See Pascucci WRT at 3-4 (``[t]he purpose that music serves 
when it is licensed for use in movies, television shows and 
advertisements is fundamentally different from the purpose it serves 
when used in CDs, downloads and other audio formats * * * While 
music can serve important purposes in terms of dramatizing a story, 
setting a mood, creating positive associations with a product, or 
drawing people's attention, the purpose of the music [in the synch 
market context] is secondary to that of the larger audio-visual work 
into which the music is incorporated--and it is that larger work 
that consumers pay to watch (in the case of a movie) or for which 
producers and advertisers pay with the hope that consumers will 
watch (in the case of a television show or advertisement).'').
---------------------------------------------------------------------------

    Potential benchmarks are confined to a zone of reasonableness that 
excludes clearly noncomparable marketplace situations. The musical 
works inputs in the synch market are used in very different ultimate 
consumer products by different input buyers as compared to the target 
market and the input sellers may have different degrees of market power 
in the benchmark market as compared to the target market. The mere fact 
a musical work is used as an input in both the proposed benchmark 
market and the target market is not sufficient to overcome all the 
aforementioned fundamental differences between the proposed benchmark 
market and the target market even in a purely relative value analysis. 
Because of the large degree of its incomparability, the synch market 
``benchmark'' clearly lies outside the ``zone of reasonableness'' for 
consideration in this proceeding. Therefore, we find this particular 
benchmark cannot serve as a starting point for the 801(b) analysis that 
must be undertaken in this proceeding.
c. The Audio Home Recording Act
    Dr. Landes also offered a third benchmark--the royalty structure 
from the Audio Home Recording Act (``AHRA''). 17 U.S.C. 1001-1010. 
Under the AHRA, royalties payable by manufacturers of digital recording 
devices are divided as follows: one-third for the ``Musical Works 
Funds'' and two-thirds for the ``Sound Recording Fund.'' Copyright 
Owners contend that this royalty allocation ``provides corroboration of 
the relative value of the rights to musical compositions and sound 
recordings through the statute's division of royalties from the sale of 
digital audio recorders.'' Copyright Owners PFF at ] 490. According to 
Copyright Owners, the AHRA was ``spurred by concerns within the music 
industry that new digital recording devices would permit consumers to 
easily make high-quality digital copies of music, adversely affecting 
the market for audio recordings.'' Copyright Owners PFF at ] 541.
    Dr. Landes concedes that the AHRA ``is not strictly the result of a 
voluntary exchange in a competitive market,'' rather, ``it reflects the 
outcome of a compromise among competing interest groups in the 
legislative context.'' Copyright Owners PFF at ] 542. Nevertheless, Dr. 
Landes contends that the AHRA rate structure ``provides evidence of the 
relative value of copyrighted songs and sound recordings.'' Id.
    Although the AHRA refers to the payments required under the act as 
``royalties,'' they are, we conclude, in no material respect comparable 
to the payments prospective licensees of copyrighted musical works 
agree to pay to obtain a license to make and distribute those works. 
Rather, the AHRA payments are legislative assessments imposed on the 
manufacturers of digital audio recording devices and media to partially 
offset potential lost revenues that the copyright owners and record 
companies may suffer as a result of unlicensed copies of sound 
recordings facilitated by those recording devices and media. Congress 
determined that a certain percentage of those assessments should be 
allocated to musical works and a certain percentage to sound 
recordings. We cannot conclude on the record before us that Congress 
intended its allocation of AHRA assessments to reflect in any respect 
its view of the relative value of musical works vis-[aacute]-vis sound 
recordings. Nor can we conclude that such an assessment would 
reasonably reflect market conditions today for comparable products, 
which is the essence of a benchmark analysis. In the absence of such 
evidence, we do not find this proffered ``benchmark'' particularly 
relevant to the task at hand.
2. RIAA and DiMA Proposed Benchmarks
    RIAA contends that a number of ``benchmarks'' are most relevant to 
our determination, including: (1) Several types of ``average effective 
mechanical royalty rates'' as calculated by their economics expert Dr. 
Wildman; (2) certain mechanical rates applicable in other countries; 
and (3) an analysis of historical norms by their economic expert Dr. 
Teece. DiMA also argues, together with RIAA, that certain mechanical 
rates applicable in other countries provide a useful benchmark for the 
licenses at issue in this proceeding.
a. Effective Mechanical Rate Data
    RIAA argues that the most appropriate ``benchmark'',\29\ as 
proffered by their

[[Page 4520]]

economics expert, Dr. Wildman, is derived by analyzing the overall 
average effective mechanical rate, compared to what would be paid if 
all mechanicals were paid at the statutory rate. Dr. Wildman further 
supplements this analysis by examining (1) what is paid for first uses 
of songs (as opposed to a subsequent use of a song that has previously 
been released), which are not subject to the compulsory license; and 
(2) the mechanical royalty rates paid for first uses to certain non-
singer songwriters who agree to rates that are not part of some broader 
agreement like those containing controlled composition clauses for 
singer-songwriters.\30\ Wildman WRT at 5-6; 42-43. According to Dr. 
Wildman, an examination of all three data sets lead to the conclusion 
that the market rate for mechanicals on CDs and digital downloads is 
between 5.25 cents and 7.8 cents per track, or about 7.25% to 10.08% of 
wholesale revenues. Id. at 6.
---------------------------------------------------------------------------

    \29\ Although RIAA indicated in their final oral argument that 
their primary ``benchmark'' was the average effective royalty rate 
in the free market (see 7/24/08 Tr. at 7864 (Smith, Closing Oral 
Argument for RIAA)), it is not clear that Dr. Wildman was 
affirmatively offering such a ``benchmark.'' First, Dr. Wildman 
testified only as a rebuttal witness and, in the context of 
criticizing Dr. Landes' choice of benchmarks, presented evidence 
that he indicated cast doubt on the accuracy of Dr. Landes' 
benchmarks. See Wildman WRT at 30. Second, in his rebuttal 
testimony, Dr. Wildman opined that for benchmarks to be useful, they 
must satisfy three specific criteria. Wildman WRT at 3. Dr. Wildman 
then not only found Dr. Landes' benchmarks wanting with respect to 
these three criteria (see, for example, Wildman WRT at 3-4), but 
also appeared to indicate that his own evidence failed to meet these 
three criteria (see 5/12/08 Tr. at 5881). Nevertheless, irrespective 
of whether they meet Dr. Wildman's criteria for a benchmark, we find 
that Dr. Wildman's various summaries of mechanical license data do 
provide some limited information relevant to our inquiry. Inasmuch 
as both RIAA as well as Copyright Owners refer to these data as 
``benchmarks'' in their arguments, we adopt their label as a 
convention in this determination.
    \30\ Controlled composition clauses reduce the royalty rate that 
a copyright user is willing to pay a songwriter who is also a 
performer. A typical controlled composition clause would place a 
percentage cap on the amount of mechanical royalties that a record 
company would be willing to pay to a songwriter/performer (i.e., a 
cap of 75% of the statutory rate). A typical controlled composition 
clause might also reduce the amount of mechanical royalties that a 
record company would be willing to pay a songwriter/performer by 
limiting the number of album tracks upon which the company would be 
willing to pay mechanicals (e.g., a 10-track limit on mechanical 
royalties).
---------------------------------------------------------------------------

    Dr. Wildman based his analysis of potential benchmarks on 
mechanical royalty data he received from three major record companies: 
SONY BMG (``SONY''), Warner Music Group (``WMG''), and Universal Music 
Group (``UMG''). Id. at 35. As a preliminary matter, the data from the 
record companies was limited to mechanical royalties negotiated and 
paid on one quarter of one fiscal year's releases, including data on 
which releases involved agreements by singer-songwriters to receive 
reduced royalties, which releases involved co-writers who had agreed to 
write songs for reduced rates, and which individual tracks were first 
uses (and thus not subject to the compulsory license). Id. In short, 
the analysis was based on data from only three record companies and 
only for a single quarter. Indeed, the data from one of the record 
companies, UMG, was not even from the same quarter as that from the 
others.\31\ Moreover, Dr. Wildman conceded that the data he received 
from UMG had limited usefulness since UMG does not separately break out 
situations in which co-writers agreed to write songs at reduced rates 
because of similar restrictions that apply to their companion 
songwriter. Id. at 36. Dr. Wildman also limited his analysis to rates 
for physical rather than digital products. In sum, Dr. Wildman himself 
conceded that his data set was less than ideal. 5/12/08 Tr. at 5850-51 
(Wildman).
---------------------------------------------------------------------------

    \31\ For SONY and WMG, the data was from the third quarter of 
2006. For UMG, it was from the fourth quarter of 2007. 5/12/08 Tr. 
at 5844.
---------------------------------------------------------------------------

    Based on this limited data set, Dr. Wildman concluded that the 
average effective per track rates for mechanical royalties for physical 
products paid by the three record companies ranged from [REDACTED] for 
WMG to [REDACTED] for UMG. Wildman WRT at 37-38. However, there are 
substantial unexplained differences in the average effective rates he 
obtains from his analysis of the data both as between different 
companies (UMG mean [REDACTED] than WMG mean) and also as between 
results obtained from different data sources for the same companies 
(e.g. 7.42 cents mean for SONY from publisher data as compared to 
[REDACTED] for SONY from record company data). Even the direction of 
the latter difference is not consistent for the two companies for which 
Dr. Wildman presents publisher data. Wildman WRT at 37-39; 5/12/2006 
Tr. at 5850-1 (Wildman). Dr. Wildman acknowledges that the agreements 
he analyzed were negotiated in an environment where the statutory rate 
is 9.1 cents, which, Copyright Owners contend is a ceiling above which 
the record companies will not pay.\32\ Dr. Wildman also acknowledged 
the presence in the agreements of so-called ``controlled composition 
clauses.''
---------------------------------------------------------------------------

    \32\ Under this argument, made by Dr. Landes and others, 
recording companies have no incentive to pay above the compulsory 
royalty rate in a voluntary agreement because they can always pay 
the compulsory rate if they are willing to comply with the 
compulsory licensing process. See, for example, Landes WRT at 39. 
The evidence in the record suggests that most are not. See, for 
example, Tr. 2/14/08 at 3325-6 (A. Finkelstein). RIAA's expert 
economist supplies another view of the compulsory license process 
compared to that offered by Dr. Landes. See Wildman WDT at 31 and 
n.39 (``[a]s witnesses for both record companies and music 
publishers have explained, essentially no one uses the compulsory 
license process--licenses for mechanical royalties for sales of 
sound recordings are negotiated in the market on a voluntary basis. 
* * * The fact that they enter into voluntary agreements is not 
itself evidence that transaction costs [in such agreements] are low. 
It simply means that the transaction costs of voluntary agreements 
are lower than those associated with using the compulsory license. * 
* *'').
---------------------------------------------------------------------------

    Dr. Wildman analyzed just that portion of the agreements that 
involved the first use of sound recordings, which are not subject to 
the compulsory mechanical royalty rate, but which may include 
controlled composition clauses. The average effective per track rates 
were [REDACTED] for SONY, [REDACTED] for WMG, and [REDACTED] for UMG. 
Wildman WRT at 42. In addition, Dr. Wildman further analyzed first use 
agreements involving ostensibly only ``pure'' songwriters (i.e., not 
singer-songwriters) or ``co-writers who had agreed to controlled rates 
and all individuals not subject to a controlled composition clause at 
all.'' Wildman WRT at 43. The per track average effective rate for this 
latter group was [REDACTED] for SONY and [REDACTED] for WMG. (UMG data 
did not permit such an analysis). Wildman WDT at 43-44. Yet, these two 
more limited (in scope of coverage) supplemental analyses do not serve 
to provide substantial corroboration for Dr. Wildman's initial broader 
effective rate analysis. Looked at on a company-by-company basis, each 
data base cut produces a substantially different result for the same 
company and a different rank order for the companies analyzed. These 
differences are not explained. Moreover, Dr. Wildman admits that his 
regression analysis of the first use data provides very little 
explanatory power for the variation in the effective rate obtained for 
WMG and UMG and, even in the best case, leaves over half the variation 
in the effective rate obtained for SONY unexplained. 5/12/2008 Tr. 
5853-4 (Wildman).
    Even viewed in the best light, Dr. Wildman's overall effective rate 
analysis is simply no more than a ``starting point'' as he himself 
cautions. 5/12/08 Tr. 5881 (Wildman). It makes no adjustment for the 
impact of controlled composition clauses that reflect trade-offs 
between the various elements of an artist contract that may cover 
rights and forms of compensation well beyond the mechanical rights 
addressed by the clause. Copyright Owners PFF at ]] 686-7. As briefly 
noted hereinbefore, the effective rates derived by Dr. Wildman also 
suffer from empirical shortcomings. Therefore, we decline to assign the 
weight necessary to Dr. Wildman's effective rate analysis to view it as 
a useful specific benchmark. However, given the absence of any more 
substantial or better evidence in the record of a lower rate, the 
Wildman overall effective rate data can help to identify the low-end 
limits for

[[Page 4521]]

reasonable rates in this proceeding. Therefore, we conclude that the 
effective rate data submitted by Dr. Wildman show only that a 
reasonable rate for the mechanical license for CDs and permanent 
downloads could not be lower than the range indicated by his broadest 
effective rate data set (i.e., 5.88 cents to 7.68 cents per song).
    Dr. Wildman does not offer an independent benchmark that would 
apply specifically to ringtones. Rather, he proffers an adjustment to 
Dr. Landes' mastertone benchmark that Dr. Wildman contends would yield 
a reasonable rate for ringtones of between 14.5% to 20% of the 
wholesale price of ringtones. See Wildman WRT at 53. Although he does 
not elaborate, the upper end of the 14.5% to 20% of wholesale range 
would yield a penny rate of 25 cents based on his assumed wholesale 
price of $1.25. The lower boundary of his estimate is based on a 
``surplus'' analysis that assumes a sharing of ``surplus'' revenues in 
the same proportion as would occur in the CD and permanent download 
market--assuming that the results of his previously discussed effective 
rate analysis were deemed to be accurate. However, given the 
shortcomings of his effective rate analysis and his own strong cautions 
against assuming that the mastertone market is comparable to the CD and 
permanent download market absent numerous other quantifiable 
adjustments (see Wildman WRT at 46), this attempt at bootstrapping 
falls flat. In addition, there are serious questions concerning the 
adequacy of Dr. Wildman's assumptions concerning his treatment of 
costs. Copyright Owners RFF at ]] 422-5. In short, questionable 
assumptions coupled with concerns over the reliability of the data used 
in the Wildman effective rate analysis cause us to regard the findings 
of Dr. Wildman's ``surplus'' analysis as carrying little, if any, 
weight.
b. 1981 CRT Decision and Historical Norms
    RIAA also invites the Judges to consider in setting a rate the 
approach taken by the Copyright Royalty Tribunal (``CRT'') in the 1981 
section 115 determination, as characterized by RIAA's expert economist, 
Dr. David Teece.\33\ According to Dr. Teece, the best place to begin 
the rate analysis should be to use the 1981 CRT decision ``as a 
starting point and [adjust it] for changes in the industry over the 
interim period.'' Teece WDT at 76. In other words, Dr. Teece recommends 
that the 1981 rate, adjusted to reflect its relative value in terms of 
today's average retail CD prices, should be adopted by the Judges as a 
benchmark and then further adjusted downward by an unspecified amount 
in order to reflect a consideration of changed circumstances \34\ over 
the past 25 years in the 801(b) factors. In the alternative, Dr. Teece 
suggests adjusting the 1997 industry settlement rate by the percent 
change in the wholesale CD price since 1998.
---------------------------------------------------------------------------

    \33\ See Adjustment of Royalty Payable Under Compulsory License 
for Making and Distributing Phonorecords; Rates and Adjustment of 
Rates, Copyright Royalty Tribunal Docket No. 80-2, 46 FR 10466 (Feb. 
3, 1981).
    \34\ For example, Dr. Teece explained that the record industry 
now confronts significant and sustained business challenges, such as 
the spread of piracy and the advent of new digital distribution 
challenges that were not present when the CRT raised the mechanical 
royalty rates in the 1981 proceeding. Dr. Teece contends that almost 
every financial indicator of the record companies' financial 
position has worsened from that described by the CRT in its 1981 
decision. Teece WDT at 79-80. However, Dr. Teece failed to 
adequately consider whether financial measures such as revenue 
generation were of greater or lesser significance than company 
profitability as the industry's structure has changed. Similarly, 
Dr. Teece fails to adequately inquire as to whether any impact of 
changed industry circumstances or changed profitability has greater 
or lesser significance for that substantial portion of the industry 
where record companies and publishers are units of the same parent 
company as compared to standalone record companies and publishers.
---------------------------------------------------------------------------

    Dr. Teece contends that following the 1981 CRT decision would 
produce a rate today of 7.8% of wholesale, which should then be 
adjusted downward to bring it into accordance with the section 801(b) 
factors. Teece WDT at 81. In the alternative, adjusting forward from 
the initial 1997 industry settlement rate would produce a rate today of 
7.6% of wholesale. Teece WDT at 113.
    We do not find that either the 1981 CRT rate or the basis of the 
1997 industry settlement is useful as a benchmark. Both the 1981 CRT 
decision and the 1997 settlement reflect a view of the product market 
that has changed substantially relative to the types of products and 
the modes of product distribution modes available today. Moreover, both 
the 1981 CRT rate as well as the 1997 industry settlement explicitly or 
implicitly incorporated the equivalent of some or all the 801(b) factor 
analysis. Although the Judges acknowledge that the financial condition 
of the industry, including the potential impact of piracy, can properly 
play a role in considering whether an adjustment is necessary to a 
particular benchmark, such considerations, in and of themselves, do not 
form the basis of a useful benchmark. Therefore, we find that neither 
of Dr. Teece's proffered ``benchmarks'' provide sufficient 
comparability to offer a useful yardstick by which to gauge prices in 
today's markets, and we defer further discussion of the condition of 
the industry until our consideration of the section 801(b) factors 
below.
c. Foreign Mechanical Rates
    DiMA contends that the most useful benchmark in the record is the 
license agreement reached in the United Kingdom for 8% of retail 
revenue plus applicable minima, which includes the reproduction, 
distribution and public performance of musical works by digital music 
services. This benchmark, according to DiMA, represents an ``upper 
bound estimate for a reasonable rate in this proceeding.'' DiMA PCL ] 
77. This benchmark was proffered by DiMA economics expert Ms. Guerin-
Calvert. In addition to also proffering the U.K. mechanical rates as a 
benchmark, RIAA suggests that both Japanese and Canadian rates are also 
relevant, although the bulk of the evidence presented by RIAA also 
related to the U.K. mechanical rates. RIAA, while agreeing with the 8% 
of retail price cited by DiMA, notes that the rate is set at 8% of 
retail price less 17.5% Value Added Tax (``VAT''). RIAA PFF at ]] 729, 
731. The RIAA presents further adjustments to arrive at a wholesale 
price equivalent of 7.7% (see RIAA PFF at ] 740), which may rise to as 
much as 11.1% of wholesale (or approximately 8.0 cents) depending on 
the amount of discounting from the Published Price to Dealer (``PPD'') 
assumed for the U.K. in order to translate the U.K. rate to an actual 
wholesale price received by record companies in the U.S. (see RIAA RFF 
at ] 123).
    DiMA and RIAA contend that the rates adopted in the U.K. 
settlements should serve as a useful benchmark because they claim those 
rates involve comparable markets,\35\ comparable parties \36\ and a 
comparable basket of rights (i.e., mechanical rights for permanent 
downloads). See, for

[[Page 4522]]

example, DiMA PFF at ]] 316-320 and RIAA PFF at ]] 316-320.
---------------------------------------------------------------------------

    \35\ DiMA and RIAA contend that there are a number of 
similarities between the recorded music industries and markets in 
the two countries (e.g., both have ``extremely significant record 
markets;'' invest heavily in A&R (artist and repertoire), marketing 
and promotion, and in developing an online music market while 
battling piracy; and are international in focus). DiMA PFF at ]] 
316-318, RIAA PFF at ]] 705-715.
    \36\ For example, DiMA states that the U.K. settlements resolved 
licensing rate disputes among the British Phonographic Industry 
Limited (a record company trade association whose members include 
the major record labels), the Mechanical-Copyright Protection 
Society Limited (which distributes royalties to the owners of 
mechanical rights), and digital distributors such as iTunes, Napster 
and MusicNet. Id. at ] 319.
---------------------------------------------------------------------------

    In reply, Copyright Owners object to the comparability of the 
foreign rates on, among other grounds, that: (1) The percentages 
presented are not applied consistently to the same revenue base 
(Copyright Owners RFF at ]] 597-601); and (2) the various foreign 
percentage rates may translate into higher actual revenue for copyright 
owners than they currently receive in the U.S. because of exchange rate 
differences (Copyright Owners RFF at ]] 601-3). The Copyright Owners' 
objections related to revenue base calculation may not fully capture 
the range of problems surrounding this issue. For example, the revenue 
base for the foreign rates is also subject to differing tax structures 
in the U.S. as compared to the U.K., adding to the difficulties of 
translating the U.K. benchmark into a U.S. equivalent benchmark.\37\
---------------------------------------------------------------------------

    \37\ To underscore this difficulty in making a comparison of 
rates across countries, one only need examine the difficulty RIAA's 
witness has in explaining the tax structure in the U.K. 2/12/08 Tr. 
2771-2 (Taylor):
    CHIEF JUDGE SLEDGE: I hate to interrupt. On page 12, before you 
leave that chart, the rates exclude the value added tax. What is the 
amount of that?
    THE WITNESS: That is 17\1/2\ percent, Your Honor, in the U.K.
    BY MR. SMITH: Q. Now, on--
    CHIEF JUDGE SLEDGE: And--17\1/2\ percent of what?
    THE WITNESS: It's charged--I'm not a tax expert, Your Honor, but 
it's actually more complicated than being charged on the retail 
price. I think you have to do some complicated calculation of 117.5 
percent of something. I'm sorry. I can't explain it very well, but 
essentially it's 17\1/2\ percent of the retail price, but it's 
calculated not by taking 17\1/2\ percent of the retail price and 
adding it. It's slightly more complicated than that.
---------------------------------------------------------------------------

    While the Copyright Owners' objections to the foreign rate 
benchmark noted hereinabove have merit, they serve to underline the 
greater concern that comparability is a much more complex undertaking 
in an international setting than in a domestic one. There are a myriad 
of potential structural and regulatory differences whose impact has to 
be addressed in order to produce a meaningful comparison. For example, 
the fact that the record industry in the U.K. does not employ 
controlled composition clauses needs to be carefully weighed in seeking 
to extend the proposed benchmark to physical product subject to such 
clauses in this country. Copyright Owners PFF at ] 713. Similarly, even 
if the foreign benchmark were purely a product of a negotiated 
settlement between similar types of parties, it is hard to imagine that 
such parties would structure their settlement to encompass not only the 
U.K. copyright regime and U.K. industry considerations but to 
simultaneously encompass the U.S. copyright regime and U.S. industry 
considerations. To the extent such parties fail to do so and 
differences exist, a comparison between such foreign rates becomes less 
probative for benchmark purposes. We find, that on the record before 
us, the full range of comparability issues has not been sufficiently 
analyzed and presented to permit us to use the foreign rates presented 
as a benchmark for the target U.S. markets in question in this 
proceeding.
3. Conclusions With Respect to Benchmarks
    Based on the evidence before us, we conclude that no single 
benchmark offered in evidence is wholly satisfactory with respect to 
all of the products for which we must set rates.
    As previously noted, the proposed mastertone benchmark certainly 
offers valuable rate evidence from the marketplace for one of the types 
of products covered by the section 115 license that is the subject of 
this proceeding (i.e., ringtones). The mastertone benchmark yields a 
rate of 20% of wholesale which if applied to the $1.20 wholesale price 
of a ringtone suggested by RIAA in their penny rate proposal (see RIAA 
Second Amended Rate Proposal, July 2, 2008, at 1-6),\38\ produces a 
penny-rate equivalent of 24 cents. However, the mastertone benchmark 
carries little weight when it is applied to the other products at issue 
in this proceeding (i.e., CDs and permanent downloads) that are, at 
best, only in small part similar in nature and ultimate consumer use.
---------------------------------------------------------------------------

    \38\ This wholesale price is consistent with Mr. Benson's 
testimony concerning a wholesale price for ringtones in 2006 of 
$1.21. Benson WRT at 22.
---------------------------------------------------------------------------

    Also as noted hereinbefore, because the effective rates derived by 
Dr. Wildman suffer from analytical and empirical shortcomings, we 
decline to employ the results of his analysis as a specific benchmark 
for CDs and permanent downloads. Rather, we conclude that the effective 
rate data submitted by Dr. Wildman show only that a reasonable rate for 
the mechanical license for CDs and permanent downloads could not be 
lower than the range indicated by his overall effective rate data set, 
or 5.88 cents to 7.68 cents per song or track. Moreover, since this 
proffered benchmark was based only on physical product data and was 
offered only as a benchmark for CDs and permanent downloads, we decline 
to assign little, if any, weight to the Wildman effective rate data set 
in determining the rate for such a different product as ringtones.
    In sum, the usable evidence with respect to rate comparables 
offered by the parties supports the determination of the parameters of 
a zone of reasonableness. Based on the record of evidence in this 
proceeding, we have determined that the 20% rate (or 24 cent penny-rate 
equivalent) identified hereinabove marks the upper boundary for a zone 
of reasonableness for potential marketplace benchmarks. We have also 
determined that potential marketplace benchmarks cannot be less than 
somewhere between 5.88 cents and 7.68 cents. However, neither of these 
two pieces of evidence offers a specific benchmark for all the products 
at issue in this proceeding in terms of comparability. Rather we find 
that the upper boundary serves as a good benchmark for ringtones, but 
only carries small weight as a benchmark for CDs and permanent 
downloads. On the other hand, with respect to CDs and permanent 
downloads, some rate closer to the lower boundary carries more weight 
than one closer to the upper boundary in terms of comparability, but, 
given the previously noted analytical and empirical shortcomings of Dr. 
Wildman's effective rate analysis, we are not persuaded that the 
existing 9.1 cent rate for such products, now in effect for nearly 
three years, is too high or inappropriate. We now turn to the 801(b) 
policy considerations to determine the extent to which those policy 
considerations weigh in the same direction or a different direction as 
the benchmark evidence hereinbefore reviewed.
4. The Section 801(b) Factors
    Section 801(b)(1) of the Copyright Act states, among other things, 
that the rates that the Judges establish under section 115 shall be 
calculated to achieve the following objectives: (A) To maximize the 
availability of creative works to the public; (B) to afford the 
copyright owner a fair return for his or her creative work and the 
copyright user a fair income under existing economic conditions; (C) to 
reflect the relative roles of the copyright owner and the copyright 
user in the product made available to the public with respect to 
relative creative contribution, technological contribution, capital 
investment, cost, risk, and contribution to the opening of markets for 
creative expression and media for their communication; and (D) to 
minimize any disruptive impact on the structure of the industries 
involved and on generally prevailing industry practice. 17 U.S.C. 
801(b)(1). In the SDARS proceeding, we stated that

[[Page 4523]]

``the issue at hand [in analyzing the section 801(b) factors] is 
whether these policy objectives weigh in favor of divergence from the 
results indicated by the benchmark marketplace evidence.'' See 73 FR at 
4094. In the current proceeding, we have found that only one applicable 
benchmark, the mastertone benchmark proffered by Dr. Landes, serves as 
a relevant reference point for determining a mechanical royalty rate, 
but only for ringtones. For CDs and permanent downloads, we find that 
the proffered benchmarks lead only to the conclusion that the existing 
statutory rate \39\ is neither too high nor too low or otherwise 
inappropriate. Our analysis of the Section 801(b) objectives, discussed 
below, leads us to further conclude that the available evidence 
submitted by the parties related to these policy objectives does not 
reasonably weigh in favor of any further adjustments beyond 
establishing a 24 cent statutory rate for ringtones and the maintenance 
of the existing previously negotiated 9.1 cent rate for CDs and 
permanent downloads without any add-on to account for general inflation 
during the license period.
---------------------------------------------------------------------------

    \39\ The current rate for physical products and permanent 
downloads is 9.1 cents per track or 1.75 cents per minute of playing 
time or fraction thereof. This rate, reached in a settlement between 
RIAA, NMPA and SGA, and adopted by the Librarian, has been in effect 
since January 1, 2006.
---------------------------------------------------------------------------

a. Maximize Availability of Creative Works
    The various arguments of the parties ultimately reduce to a 
question of whether their respective incentives with respect to this 
policy objective will be adversely impacted by the rates adopted in 
this proceeding.
    Copyright Owners' argument with respect to this objective is that 
songwriters and music publishers rely on mechanical royalties and both 
have suffered from the decline in mechanical income. See Copyright 
Owners PFF at ] 343. Under the current rate, they contend, songwriters 
have difficulty supporting themselves and their families. As one 
songwriter witness explained, ``The vast majority of professional 
songwriters live a perilous existence.'' Carnes WDT at 3. We 
acknowledge that the songwriting occupation is financially tenuous for 
many songwriters. However, the reasons for this are many and include 
the inability of a songwriter to continue to generate revenue-producing 
songs, competing obligations both professional and personal, the 
current structure of the music industry, and piracy. The mechanical 
rates alone neither can nor should seek to address all of these issues. 
We find no persuasive evidence in the record to support the notion that 
the current mechanical royalty rates are leading to a shortage of 
musical compositions. Furthermore, while we acknowledge that the 
mechanical royalty rate is an important source of income for 
songwriters, we find no persuasive evidence in the record that an 
undiminished nominal \40\ mechanical rate will fail to ensure adequate 
incentives for songwriters and publishers over the course of the 
license period in question.
---------------------------------------------------------------------------

    \40\ We employ the term ``nominal'' only to connote that the 
rate in question is stated in current dollars.
---------------------------------------------------------------------------

    RIAA for its part contends that this policy objective is only 
satisfied to the extent that the mechanical rate levels provide 
sufficient incentives for record companies to make sound recordings out 
of the musical works provided by the songwriters because, they contend, 
it is only through these sound recordings that the musical works reach 
the consuming public. See, for example, RIAA PCL at ] 69. RIAA argues 
that in light of declining industry revenues from the sale of physical 
products, the mechanical royalty rate must be lowered so as to provide 
record companies with sufficient cost reductions and, thereby, 
sufficient incentives to continue to make sound recordings available to 
the same degree. See, for example, RIAA RFF at ] 349. However, 
Copyright Owners respond that: (1) Record company declining album sales 
in recent years have not been shown to be the result of the current 
mechanical rate and, indeed, Dr. Teece, RIAA's own economic expert, 
attributes the decline to a ``whole set of demand-related phenomena'' 
rather than only the size of mechanical royalties; and (2) 
notwithstanding this recent decline in physical product revenues, other 
product lines have grown and the record companies continue to enjoy 
profitability. See Copyright Owners RFF at ]] 85-86 and 147. While the 
recording industry's physical product revenues have declined in recent 
years, the reasons for this decline are many and include, but are not 
limited to, various management and business planning decisions made by 
individual record companies, shifts in the modes of music distribution, 
and piracy. We find no persuasive evidence in the record to support the 
notion that the current mechanical royalty rates are substantially 
responsible for, let alone are the direct and sole reason for, any 
espoused contraction in the overall number of sound recordings reaching 
the public. Similarly, there is no persuasive case made in the record 
that reducing the nominal mechanical rate will positively impact sound 
recording production and distribution. Nor does the record before us 
even persuasively indicate that a reduction in this one specific 
nominal royalty rate is the only cost cutting solution available.\41\ 
In other words, we find that the record of evidence does not support 
the notion that an undiminished nominal mechanical rate will reduce 
record company incentives over the course of the license period in 
question.
---------------------------------------------------------------------------

    \41\ For example, the record companies may well be able to make 
reductions in overhead costs which remain substantial despite 
restructuring efforts. See Copyright Owners RFF at ]] 131-3.
---------------------------------------------------------------------------

    At the same time, in an environment where overall industry revenues 
are declining, any increase in the nominal mechanical rates to reflect 
general inflation should be reasonably justified. Because the Copyright 
Owners' general inflation adjustment is neither specific as to timing 
or frequency (see 7/24/08 Tr. at 7791-2, Cohen Closing Argument for 
Copyright Owners) nor supported by any persuasive rationale justifying 
such an adjustment (RIAA RFF at ]] 479-81; see also DiMA PFF at ]] 259-
60), we find no reason to increase these nominal rates to reflect 
changes in the general level of inflation.
    DiMA contends that this policy objective is best satisfied by 
lowering mechanical royalty rates to encourage companies, such as DiMA 
members, that make musical works available to the public through 
digital distribution. DiMA PCL at ] 34. But DiMA's focus is a narrow 
one which excludes consideration of the impact of its proposals on the 
overall supply of sound recordings through both physical and electronic 
distribution modes. It fails to adequately consider and measure the 
substitution effects of changes in the price of only one mode of 
distribution. Therefore, we are not persuaded that lowering the nominal 
cost for a single input used in a single mode of distribution will call 
forth even greater overall growth in the production and distribution of 
sound recordings.\42\ Moreover, even with respect to the limited scope 
of its concerns, DiMA offers no specific empirical evidence such as 
demand elasticities or persuasive consumer surveys to support the 
cause-and-effect results which it postulates. While we agree that 
digital distribution of musical recordings, such as that provided 
through DiMA members like Apple's iTunes, provides an important avenue 
for enhancing the

[[Page 4524]]

public's access to creative works, we find no persuasive evidence in 
the record that simply lowering the mechanical rates, as DiMA has 
proposed, will necessarily increase the public's access to those 
creative works. Indeed, as noted hereinbefore, digital distribution has 
grown considerably while the current mechanical rates have been in 
place.
---------------------------------------------------------------------------

    \42\ Dr. Landes also points out that setting a low rate simply 
to favor one mode of distribution may lead to market distortions of 
a type that may not be justifiable economically. Landes WRT at 18.
---------------------------------------------------------------------------

    We find that the current nominal statutory mechanical rates for 
physical products and permanent downloads as well as the current market 
nominal rates for ringtones as reflected by the Landes benchmark, on 
balance, will address each of the issues stressed by the parties and 
should help to maximize the availability of creative works to the 
public. In other words, the policy goal of maximizing the availability 
of creative works to the public is reasonably reflected in these 
current nominal rates and, therefore, no further adjustment is 
warranted.
b. Afford Fair Return/Fair Income Under Existing Market Conditions
    With respect to this policy objective, Copyright Owners contend 
that ``[w]hereas the record companies can ensure themselves a fair 
return through their pricing policies, a songwriter has no such option, 
because the right of songwriters and music publishers to earn a fair 
return depends upon the availability of a sufficient statutory rate of 
return.'' Copyright Owners PCL at ] 81, citation omitted.
    Copyright Owners further contend that:

    [S]ubstantial evidence adduced at trial shows that record 
company profitability has been increasing due to streamlining of the 
physical business and improved margins on digital sales, which have 
relieved the record companies of substantial manufacturing, 
distribution, and returns expense. Record companies have also 
identified, and have begun to exploit, other new revenue streams 
through ``360 contracts,'' synchronization deals and performing 
rights royalty collections. The economics of digital distribution 
should lead to even greater profitability as the share of digital 
sales continues to grow.

Copyright Owners PCL at ] 89.
    Copyright Owners also contend that ``[t]he record shows that 
iTunes, the dominant seller of permanent downloads, is profitable and 
would continue to be profitable if the 15 cent permanent download rate 
[proposed by the Copyright Owners] were adopted, whether or not Apple 
absorbs the cost.'' Id. Copyright Owners further assert that ``[t]he 
evidence also shows that there has been substantial new entry into the 
permanent download business and DiMA has not established that new 
entrants would be precluded from entering the business, and thriving in 
it, by the Copyright Owners' proposed rate.'' Id.
    For its part, RIAA contends that, in analyzing this policy 
objective, the Judges must consider existing economic conditions, 
which, RIAA asserts ``means a period in which record companies have 
faced and continue to face enormous challenges, in which consumers are 
willing to pay less and less for CDs, the prices of digital downloads 
are stagnant or softening and the prices of ringtones are falling, and 
in which publishers are making healthy profits far beyond a reasonable 
risk-adjusted return on capital.'' RIAA PCL at ] 80. On this latter 
point, RIAA further contends that ``The result of the current system is 
that music publishers generate bloated profit margins and record 
companies and songwriters each bear the brunt.'' RIAA PCL at ] 96.
    DiMA proposes that, in analyzing this policy objective, we also 
consider the impact of piracy on the music industry and the role that 
digital music services play as ``the most important bulwark against 
piracy.'' DiMA PCL at ] 41.
    In addressing this policy objective, we have analyzed the myriad of 
forces that are currently at play in the music industry. These include, 
as discussed above, falling sales of CDs and the commensurate impact 
that such decreases have had on record companies as well as on the 
copyright owners. We have also considered the rising importance to 
record companies and copyright owners of revenues from downloads and 
from mastertones. Then too, we have examined the record evidence 
regarding the role that piracy has played in the industry. In this 
latter context, we have analyzed the available evidence on the costs 
that record labels and publishers have incurred in battling piracy, 
whether through legal action or through changes in business models. We 
have also examined the role that new services, such as iTunes, may have 
played in channeling consumers toward legal sources of sound 
recordings. In addition, in determining reasonable mechanical rates, we 
considered evidence that there is little if any actual current use of 
the section 115 statutory license even when an identical rate is agreed 
upon by users and owners.\43\ Then too, we have considered that a 
significant portion of the mechanical royalties that songwriters earn, 
in those instances where the songwriter is not also the publisher, 
ultimately is paid to music publishers, including some that are 
affiliated with the record companies themselves. We also considered the 
relative contribution that music publishers make to the process.
---------------------------------------------------------------------------

    \43\ See, for example, 2/14/2008 Tr. 3325-6 (A. Finkelstein).
---------------------------------------------------------------------------

    Viewing the totality of the evidence on this policy objective, we 
find that Copyright Owners have not provided sufficient evidence to 
establish that songwriters or publishers, under existing market 
conditions, will fail to receive a fair return for the artists' 
creative works as a result of the adoption of a 24 cent statutory rate 
for ringtones based on marketplace evidence and the maintenance of the 
existing statutory 9.1 cent rate for CDs and permanent downloads. Nor 
do we find that RIAA or DiMA have provided sufficient evidence that 
would establish that their income, under existing economic conditions, 
would be unfairly constrained by adopting these rates. In short, we do 
not find that the evidence in the record supports any further 
adjustment to these in order to achieve this policy objective.
c. Reflect Relative Roles of Copyright Owner and Copyright Users
    This policy objective requires that the rates we adopt reflect the 
relative roles of the copyright owner and the copyright user in the 
product made available to the public with respect to relative creative 
contribution, technological contribution, capital investment, cost, 
risk, and contribution to the opening of markets for creative 
expression and media for their communication. In this connection, the 
Copyright Owners emphasize the songwriters' efforts in writing the 
creative work, the publishers' efforts in supporting the songwriters, 
both financially through advances, and professionally by introducing 
them to co-writers.\44\ Not surprisingly, RIAA emphasized the record 
companies' efforts in identifying promising artists, financing sound 
recordings, promoting and distributing the songwriters'

[[Page 4525]]

creative works.\45\ Finally, DiMA emphasized the contribution digital 
distribution companies make, both through technological innovation, and 
through capital expenditure in developing and nurturing new avenues for 
the commercial exploitation of the artists' works.\46\
---------------------------------------------------------------------------

    \44\ Copyright Owners maintain that ``the songwriter is the 
provider of an essential input to the phonorecord: The song 
itself.'' Copyright Owners PCL at ] 91, quoting the 1981 CRT 
decision, 46 FR at 10480. Copyright Owners further contend that 
``the overwhelming weight of the evidence established that music 
publishers--both majors and independents--are responsible for 
discovering and developing songwriters and then assisting them in 
sharing their creativity with the public. This requires significant 
financial investments and involves substantial risk. Publishers 
provide advances to songwriters, which typically constitute a large 
percentage of the publishers' yearly expenses. In addition, the 
success rate of songwriters is very low. Thus, the recoupment rates 
of publishers are low, and yearly write-offs are high.'' Copyright 
Owners PCL at ] 94.
    \45\ RIAA also asks that we consider that ``[t]he record 
companies' business model is changing radically and they are facing 
declining sales and revenues, while at the same time the music 
publishers are facing much less difficult economic times.'' Id. at ] 
101. RIAA also asserts that ``the impact of investment by record 
companies on other revenue streams of the music publishers is highly 
relevant to the risks that each party faces. Where, as here, 
expenditures of the record companies on the creation, marketing, and 
distribution of sound recordings actually facilitate and promote 
other revenue streams of the music publishers (such as 
synchronization and performance revenues), that promotion reduces 
the risk faced by songwriters and music publishers.'' Id. at ] 103. 
Finally, RIAA contends that ``record companies make all of the 
investments to create sound recordings, market and distribute them, 
and are essentially the sole (and certainly the primary) outlet for 
musical works.'' Id. at ] 104.
    \46\ According to DiMA, ``[d]igital music distributors play a 
most important role relative to `technological contribution, capital 
investment, cost, risk, and contribution to the opening of new 
markets for creative expression and media for their communications.' 
'' DiMA PCL at ] 52. They do this, DiMA contends, by offering 
``millions of songs in comprehensive catalogs through simple-to-use 
and elegant Web sites that allow for easy browsing, as well as 
powerful search and cataloging tools * * * [and] compelling 
editorial content.'' Id. at ] 53. In addition, they contribute 
through servers that provide ``massive storage capabilities, 
bandwidth, and transmission facilities * * *.'' Id. at ] 54. In 
short, DiMA asserts that the Judges should consider the fact that 
``DiMA member companies have developed an entirely new industry and 
educated consumers about entirely new ways to pay for music [as an 
alternative to piracy].'' Id. at ] 58.
---------------------------------------------------------------------------

    Upon a careful weighing of the evidence submitted by the parties, 
we find that the current market indicated rate for ringtones and the 
current statutory rate for physical product and permanent downloads 
require no further adjustment arising from a consideration of this 
policy factor. Stripped of the considerable hyperbole attached to the 
evidentiary interpretations offered by the parties' advocates, no 
persuasive evidence of substantial change in the balance of the 
contributions made by the parties appears to necessitate against the 
unadjusted continuation of these previously negotiated nominal rates 
over the course of the license period.
d. Minimize Disruptive Impact
    In the SDARS proceeding, we noted that a new mechanical royalty 
rate may be considered to be disruptive ``if it directly produces an 
adverse impact that is substantial, immediate and irreversible in the 
short-run because there is insufficient time for [the parties impacted 
by the rate] to adequately adapt to the changed circumstances produced 
by the rate change and, as a consequence, such adverse impacts threaten 
the viability of the music delivery service currently offered to 
consumers under this license.'' 73 FR at 4097. The same analysis 
applies in this proceeding as well.
    RIAA argues that the current statutory rate is already disruptive 
and, as a consequence, any increase such as that proposed by Copyright 
Owners must also be disruptive. See RIAA PFF at ]] 1441-52. Copyright 
Owners respond that an increase in the mechanical rates, as they have 
proposed, would not have a disruptive impact on record companies 
because their aggregate profitability is on the rise and mechanicals 
constitute only a small fraction of their overall expense. Copyright 
Owners PCL at ] 98. Moreover, Copyright Owners argue that, with respect 
to DiMA companies, the digital market is growing rapidly. They point to 
the success of iTunes as evidence that DiMA members ``can easily absorb 
the increases in the penny rate'' that they seek. Id. at ] 100. DiMA, 
in turn, argues that the Judges should at a minimum avoid rates and 
rate structures that would adversely affect digital music distributors' 
ability to attain a sufficient subscriber base or generate sufficient 
revenue to reach certain financial targets. DiMA PCL at ] 63. DiMA 
contends that the rates proposed by Copyright Owners ``would halt 
innovation in its tracks. Even if [the Copyright Owners' proposed 
rates] did not stop digital distribution entirely, [they] would stifle 
further entry [into the market].'' Id.
    Because the rates we have identified as reasonable are currently in 
place (as marketplace rates in the case of ringtones and as the 
statutory rate in the case of CDs and permanent downloads), the various 
arguments concerning the consequences of a rise in the applicable rates 
is inapposite. Furthermore, we find that the RIAA's contentions with 
respect to the disruptive impact of the current rates have little 
merit. RIAA's list of horribles allegedly attributable to the current 
mechanical rates is not supported by any substantial evidence of cause-
and-effect. Even the RIAA admits that ``high mechanical royalty rates 
did not cause all of these problems.'' Compare RIAA PFF at ] 1441 
listing record industry disruptions with RIAA PFF at ] 1442. Further, 
the RIAA's proffered evidence fails to persuade us that reducing this 
one particular cost will alleviate all the claimed record industry 
adversity in any substantial way and fails to adequately weigh other 
cost-based or demand-based alternative explanations for the alleged 
adversity. Similarly, DiMA's claims related to lowering the bar for new 
market entrants are not adequately supported by evidence to indicate 
the degree to which the overall cost structure and pricing capabilities 
of such new entrants differ from existing market participants such as 
Apple iTunes. Thus, we find that RIAA and DiMA have failed to show that 
the current mechanical rates have caused and are anticipated to 
continue to cause an adverse impact that is substantial, immediate and 
irreversible in the short-run because there is insufficient time for 
the parties impacted by the rate to adequately adapt to the changed 
circumstances produced by the rate change and, as a consequence, such 
adverse impacts threaten the viability of the music currently offered 
to consumers under this license. SDARS, 73 FR at 4097.
    On the other hand, Copyright Owners contend that the ``draconian'' 
cut in royalties that RIAA and DiMA seek would cause disruption to the 
Copyright Owners. They contend that such a cut would have a 
disproportionate impact upon songwriters but also argue that a rate cut 
would ``materially impact the ability of music publishers to play the 
vital role in the creation of music that songwriters depend upon to 
exercise their creative craft.'' Id. at ] 101. Again, inasmuch as the 
rates we have identified as reasonable are currently in place, these 
arguments concerning the consequences of a substantial cut in the 
applicable rates are inapposite. Furthermore, in analyzing the 
potential disruptive impact the rates we have adopted may have on the 
market we examined not only the rates but also the rate structure and 
have found that continuing the penny-rate structure rather than 
fostering disruption in the industry will likely minimize such 
disruption. See supra at section IV.B.2.
    The current compulsory rates for CDs and permanent downloads are 
rates that the copyright owners and copyright users have been paying 
since 2006. In addition, the evidence before us indicates that a 
ringtone rate derived from the Landes mastertone benchmark is 
comparable to the average rate that copyright owners currently receive 
and that copyright users currently pay. Therefore, we do not find from 
the record before us that these rates would have an adverse impact that 
is substantial, immediate and irreversible in the short-run.

[[Page 4526]]

5. Summary of Rates Determined
    In conclusion, the Judges find that our consideration of the 801(b) 
policy factors indicates that both a nominal rate of 9.1 cents for 
physical products and permanent downloads and a nominal rate of 24 
cents for ringtones are reasonable without further adjustment over the 
term of these licenses.
6. RIAA's Proposed General DPD Rate
    As previously discussed, the parties to this proceeding are asking 
the Judges to establish royalty rates for physical phonorecords, 
permanent downloads and ringtones, the parties themselves having agreed 
to rates for limited downloads and interactive streaming. RIAA insists 
in its Proposed Conclusions of Law that we are obligated to establish a 
catch-all rate for DPDs (but not physical product) that are not 
permanent, limited downloads, interactive streaming or ringtones. RIAA 
PCL at ]] 164-170. It concludes that such a catch-all rate--which it 
describes as a rate for ``general DPDs''--is required by 17 U.S.C. 
115(c)(3)(C) of the Copyright Act which directs us to establish rates 
and terms ``for the activities specified by this section.'' RIAA 
submits that the correct rate for ``general DPDs'' should be the same 
as the one it has proposed for physical phonorecords and permanent 
downloads. For the reasons discussed below, we decline to adopt RIAA's 
proposal.
    RIAA's interpretation of ``the activities specified by this 
section'' incorrectly conflates ``activities'' with its conception of 
musical products and services offered as digital phonorecord 
deliveries. The ``activities'' referred to in section 115 are the 
making and distribution of phonorecords, see 17 U.S.C. 115 (preamble), 
not musical products and services. Our obligation to set rates and 
terms for the making and distribution of phonorecords is amplified only 
with respect to the distinction that we must draw between phonorecords 
that are incidental to a transmission that constitutes a digital 
phonorecord delivery and ``digital phonorecord deliveries in general.'' 
17 U.S.C. 115(c)(3)(C). Even RIAA does not suggest that the latter 
language creates a standalone category, separate from the music 
products and services currently offered or which may someday be 
offered, and known as a general DPD.\47\ In sum, we cannot find any 
statutory obligation that requires us to set a rate for general DPDs.
---------------------------------------------------------------------------

    \47\ The weakness of RIAA's interpretation of ``activities 
specified by this section'' is further underscored by its particular 
confinement to the category of DPDs. The sentence from which the 
phrase is drawn refers to a proceeding under chapter 8 to establish 
rates and terms for all of Section 115, not just DPDs. Pushing 
RIAA's argument to its logical conclusion would mean that we would 
have to set a general rate for both DPD and non-DPD phonorecords 
(i.e., physical products).
---------------------------------------------------------------------------

    Furthermore, and even more importantly, even if we were to accept 
RIAA's argument that such a rate must be set, RIAA (as well as DiMA and 
the Copyright Owners) has failed to present any evidence whatsoever to 
support a rate determination. All RIAA has given us is a proposal that 
the rate for general DPDs should be the same as that for physical 
products and permanent downloads, plus a couple of oblique references 
to Copyright Owners' witnesses mentioning the possible introduction of 
future hybrid musical products. RIAA PCL at ] 165. We cannot adopt 
rates for even one of these future products in the face of such an 
empty record, let alone a single rate applicable to a variety of such 
products, without acting arbitrarily and capriciously. See Recording 
Industry Ass'n of America v. Librarian of Congress, 176 F.3d 528, 535-
36 (DC Cir. 1999) (Librarian acted improperly by adopting terms with no 
record evidence to support them); accord, Nat'l Ass'n of Broadcasters 
v. Librarian of Congress, 146 F. 3d 907, 924 (DC Cir. 1998) (Librarian 
must act with regard to the record). Nor do we see how a convincing 
record could be built at this time due to the speculative nature of the 
products and the consequent lack of evidentiary tools that we would 
possess to evaluate them in setting rates.

V. Terms

    Like the webcasting and preexisting subscription and satellite 
digital audio radio services proceedings, the current proceeding 
requires the Copyright Royalty Judges to establish ``terms of royalty 
payments'' for the section 115 license. 17 U.S.C. 115(c)(3)(C). Unlike 
the prior proceedings, however, authority to set the terms is divided 
between the Judges and the Register of Copyrights.\48\ RIAA and 
Copyright Owners agreed that the Judges' authority to adopt their 
proposals was limited to provisions related to notice of use of 
copyright owners' works and recordkeeping, though they disagreed as to 
whether the Judges have authority to adopt provisions related to late 
payments. On July 25, 2008, the Judges referred to the Register of 
Copyrights material questions of substantive law concerning the 
authority to adopt terms, and the Register delivered her decision on 
August 8, 2008. See Memorandum Opinion on Material Questions of 
Substantive Law, Docket No. RF 2008-1 (August 8, 2008); see also, 73 FR 
48396 (August 19, 2008).
---------------------------------------------------------------------------

    \48\ The Register's current regulations for the Section 115 
license are set forth in 37 CFR 201.18-19.
---------------------------------------------------------------------------

A. Proposals of the Parties

1. RIAA
    RIAA initially proposed four terms in this proceeding. One of the 
requests proposed a term providing that when a DPD is not distributed 
directly by the compulsory licensee, it should be considered as 
distributed in the accounting period in which it is reported to the 
compulsory licensee, contrary to 37 CFR 201.19(a)(6) of the Register's 
rules which provides that a DPD is to be treated as made and 
distributed on the date that it is digitally transmitted. RIAA now 
considers this term as being outside the authority of the Judges to 
adopt and is no longer proposing it. See Second Amended Proposed Rates 
and Terms of the Recording Industry Association of America, Inc. at 7, 
n.2 (``RIAA Second Amended Proposal''). As this proposed term is no 
longer before us, the Judges do not consider it.
    The other three terms are as follows. First, RIAA asks that we 
adopt a term permitting monthly and annual statements of account to be 
signed by a duly authorized agent of the compulsory licensee, 
notwithstanding 37 CFR 201.19(e)(6) and (f)(6)(i) which require that 
the signature be of a duly authorized officer of a corporation or, if 
the licensee is a partnership, a partner. RIAA PFF at ]] 1770-71; RIAA 
Second Amended Proposal at 7. Second, RIAA requests that an audit 
performed in the ordinary course of business according to generally 
accepted auditing standards by an independent and qualified auditor 
serve as acceptable verification in lieu of 37 CFR 201.19(f)(6) which 
requires that each annual statement of account be certified by a 
licensed Certified Public Accountant. RIAA PFF at ]] 1772-76; RIAA 
Second Amended Proposal at 7. Third, RIAA requests that the Judges 
issue a regulation ``clarifying'' that the Section 115 license extends 
to all reproduction and distribution rights that may be necessary to 
engage in activities covered by the license, including (1) the making 
of reproductions by and for end users; (2) reproductions made on 
servers; and (3) incidental reproductions made under authority of the 
licensee in the normal course of engaging in such activities, including 
cached, network, and buffer

[[Page 4527]]

reproductions. RIAA PFF at ]] 1777-78; RIAA Second Amended Proposal at 
7.
    RIAA makes two additional requests in its Second Amended Proposal 
that, while not stylized as terms, are similar in nature to the third 
request described above. These terms are offered as a part of RIAA's 
alternative rate structure which seeks to convert its percentage of 
revenue rate into a penny rate. The first calls for an interpretation 
of the statute related to locked content. ``Locked content,'' according 
to RIAA

is a recording that has been encrypted or degraded so as to be 
accessible in non-degraded form only for limited previewing absent a 
purchase transaction. For example, a computer hard drive or an MP3 
player might ship with a thousand or more locked recordings that 
would be available for the consumer to buy and unlock.

RIAA PFF at ] 1674 (citing testimony of Andrea Finkelstein and Mark 
Eisenberg); see also, RIAA Second Amended Proposal at 6. RIAA requests 
that the Judges determine that a locked content product is considered 
distributed for purposes of the section 115 license, and the royalty 
becomes payable, when the product is unlocked by the consumer. RIAA PFF 
at ] 1676. The other term related to RIAA's alternative penny rate 
proposal is related to what RIAA describes as ``multiple instances.'' 
Specifically, RIAA seeks a determination from the Judges that when 
there are multiple fixations of the same sound recording on the same 
product or as a la carte downloads as part of a single transaction, the 
price of the transaction should be used to determine the applicable 
rate category and all fixations should be considered one for purposes 
of the Section 115 license. RIAA PFF at ] 1678; RIAA Second Amended 
Proposal at 6. This clarification of the statute is necessary, 
according to RIAA, so that products such as DualDisc, where the same 
sound recording appears on a disc multiple times to enable the disc to 
be played on multiple devices or at different levels of sound quality, 
are paid for at the single penny rate and not ``multiple instances'' 
for all reproductions of the same recording. RIAA PPF at ] 1679.
2. Copyright Owners
    Copyright Owners propose five terms, one of which seeks a 
clarification of the statute. The centerpiece of Copyright Owners' 
requests, and the one to which it supplied the most testimony, is the 
application of a 1.5% per month late fee from the day payment should 
have been made to the day payment is actually received by a copyright 
owner. Copyright Owners PFF at ] 842; Copyright Owners Amended Proposed 
Rates and Terms at 3 (July 2, 2008). A requested term related to this 
proposal is the recovery of reasonable attorneys fees expended by 
copyright owners to collect past due royalties. Copyright Owners PFF at 
] 842; Copyright Owners Amended Proposed Rates and Terms at 4. And a 
third proposed term, which Copyright Owners claim is related to the 
late payment issue, is a 3% pass-through assessment where a compulsory 
licensee authorizes a digital music service to make and distribute 
DPDs. Copyright Owners PFF at ] 842; Copyright Owners Amended Proposed 
Rates and Terms at 3-4. A pass-through charge is necessary, according 
to Copyright Owners, because pass-through licenses result in an 
inability of music publishers to audit music services, result in 
payment delays, and prevent music publishers from establishing direct 
business relationships with music services. Copyright Owners PFF at ]] 
862-865.
    Copyright Owners' fourth request is related to the audits of 
compulsory licensees that they currently conduct. Specifically, 
Copyright Owners seek a term that requires the reporting for each 
specific activity licensed under Section 115 and, in the case of pass-
through licenses, the identification of the online retailer through 
which the DPDs occurred. Copyright Owners PFF at ] 842; Copyright 
Owners Amended Proposed Rates and Terms at 4.
    The fifth and final term \49\ seeks a ``clarification'' of 17 
U.S.C. 115(c)(2) as to when phonorecords are made and distributed and 
therefore when payment is calculated and becomes due. Copyright Owners 
request that we determine that the royalty fee becomes due on the date 
that a phonorecord is distributed, not the date on which it is 
manufactured. Copyright Owners PFF at ]] 842, 867; Copyright Owners 
Amended Proposed Rates and Terms at 4.
---------------------------------------------------------------------------

    \49\ Copyright Owners also requested a particular definition of 
revenue, which it identified as a term, for the operation of its 
rate proposal for ringtones. Copyright Owners PFF at ] 842; 
Copyright Owners Amended Proposed Rates and Terms at 4. However, 
since the Judges are not adopting Copyright Owners' rate proposal 
for ringtones and instead are adopting a penny rate, consideration 
of a definition of revenue is not necessary.
---------------------------------------------------------------------------

3. DiMA
    Consistent with DiMA's rate proposal of a percentage of revenue, 
DiMA proposes a definition of revenue which includes definitions of 
applicable receipts, a permanent digital phonorecord delivery, a 
licensee, a licensee's carriers and a licensed work. DiMA Second 
Amended Proposed Rates and Terms at 1-3. Because the Judges are not 
adopting a percentage of revenue rate structure, consideration of these 
proposed terms is not necessary. This leaves DiMA with one proposed 
term which is another request for ``clarification'' of the statute. 
DiMA asks the Judges to clarify that the section 115 license extends 
to, and includes full payment for, all reproductions necessary to 
engage in the activities permitted by the license, including masters, 
reproductions on servers, cached, network and buffer reproductions, and 
the making of reproductions by and for end users. Id.

B. Adopted Term: Late Fee

    Section 803(c)(7) of the Copyright Act provides that a 
determination of the Copyright Royalty Judges may include terms with 
respect to late payment, and the Register of Copyrights has confirmed 
that we have authority to adopt terms for past due payments for this 
statutory license. See Memorandum Opinion on Material Questions of 
Substantive Law, RF 2008-1 at 11 (August 8, 2008), 73 FR 48399 (August 
19, 2008). Consistent with our adoption of the same term for late 
payments in the Webcaster II and SDARS determinations, 72 FR 24084, 
24107 (May 1, 2007) (Webcaster II), 73 FR 4080, 4099 (January 24, 2008) 
(SDARS), we are establishing a late payment fee of 1.5% per month 
measured from the date the payment was due as provided in the 
regulations of the Register. See 37 CFR 201.19(e)(7)(i).
    RIAA argues that the marketplace for mechanical licenses with music 
publishers does not provide for late fees, noting their absence in 
Harry Fox Agency licenses\50\ and certain licensing agreements executed 
by EMI Music Publishing and BMI Music Publishing, and submits that we 
are therefore precluded from adopting such a term. RIAA PFF at ]] 1784-
92; RIAA PCL at ]] 219-20. Were the standard for considering terms 
under the section 115 license willing buyer/willing seller, we might be 
given pause. However, we are directed by the terms of this license to 
establish reasonable terms that are consistent with the section 801(b)

[[Page 4528]]

factors. RIAA does not argue that a 1.5% per month late fee is 
violative of one or more of the section 801(b) factors, nor that 
section 801(b) requires a downward adjustment of the fee. As we said in 
SDARS, ``[i]n determining an appropriate late fee, a balance must be 
struck between providing an effective incentive to the licensee to make 
payments timely on the one hand and not making the fee so high that it 
is punitive on the other hand.'' 73 FR at 4099 (also applying the 
section 801(b) factors). We determine that the 1.5% late fee achieves 
this balance.
---------------------------------------------------------------------------

    \50\ Copyright Owners and RIAA presented conflicting testimony 
as to the extent that late payments occur under licenses issued by 
the Harry Fox Agency and to the extent that those late payments were 
covered by advances paid by certain record companies. Compare 5/19/
2008 Tr. 7033-35 (Pedecine) (70 percent of total dollars owed was 
late, the average lateness of such payments was 80 days) with RIAA 
PFF at ]] 1793, 1805 and 1812 (writers and publishers are the cause 
of most late payments and record companies pay advances to cover 
many late payment situations).
---------------------------------------------------------------------------

    In further resisting a late payment fee, RIAA argues that late 
payments are often not the fault of the record companies and are often 
the result of songwriters and producers in certain genres of music 
failing to agree as to the appropriate ``copyright splits''--i.e., who 
and how many individuals have contributed copyrightable authorship to 
the creation of a musical work and are therefore entitled to royalties. 
RIAA PFF at ]] 1793-1804. RIAA also faults music publishers for 
internal administrative failings which, according to RIAA, often result 
in record companies being unable to timely pay royalties to the correct 
recipients. RIAA PFF at ]] 1793-1804. The reasons for why payments are 
late, however, represent the parties' disagreement with the payment 
requirements set forth in the statute and in the Register of 
Copyrights' regulations. See 37 CFR 201.19(e)(7), (f)(7). If users of 
the Section 115 license cannot possibly make payments in compliance 
with those requirements, then they must seek redress from the Congress 
or the Copyright Office. They have no bearing on our determination 
where we have not been presented with testimony that a 1.5% per month 
late fee is so burdensome and unfair as to escape the bounds of 
reasonableness as defined by Section 801(b).

C. Terms Not Adopted

    Putting aside the question of the Judges' authority vis-[agrave]-
vis the Register of Copyright to adopt particular types of terms, the 
Judges determine that there are immensely practical reasons for not 
adopting the remaining terms that the parties propose. Two of RIAA's 
proposed terms--permitting duly authorized agents to sign statements of 
account and permitting annual statements of account to be verified by 
non-certified auditors--are contrary to express provisions set forth in 
the Register's regulations. See 37 CFR 201.19(e)(6) and (f)(6)(i) 
(statement of account must be signed by officer of a corporation or a 
partner), 17 U.S.C. 115(c)(5) and 37 CFR 201.19(f)(6) (annual statement 
of account must be certified by licensed Certified Public Accountant). 
Were the Judges to adopt these two proposals, members of the public 
seeking to use the Section 115 license would be required to choose 
between the Judges' and the Register's regulations in completing their 
statements of account or to determine whether compliance with both sets 
of regulations was required.\51\ Given that RIAA failed to produce 
compelling evidence that the Register's regulations are so burdensome 
as to require the adoption of contrary provisions, we decline to adopt 
RIAA's proposed terms.\52\
---------------------------------------------------------------------------

    \51\ We also believe that RIAA's proposal would add an 
unnecessary layer of complexity to the regulatory process, 
encouraging, if not requiring, compulsory licensees to constantly 
cross-check the Judges' and Register's regulations for conflicting 
provisions.
    \52\ Likewise, we make no recommendation to the Register to 
alter or amend her current regulations on this point.
---------------------------------------------------------------------------

    The same reasoning applies to Copyright Owners' request for the 
reporting of royalties earned for each specific configuration of a 
licensed product. The Register's regulations governing both the monthly 
and annual statements of account already provide that each report 
identify the configuration of the product involved. See 37 CFR 
201.19(e)(3)(ii) (monthly statement), 37 CFR 201.19(f)(4) (annual 
statement). We likewise decline to adopt Copyright Owners' request for 
identification of a digital music service provider operating pursuant 
to a pass-through license. Copyright Owners suggested that such a 
requirement might assist copyright owners' auditing efforts but failed 
to demonstrate that the effectiveness of auditing is foreclosed by the 
lack of such information.
    Copyright Owners ask us to adopt a 3% surcharge on royalties for 
all pass-through licensing arrangements arguing that such a provision 
is necessary because these arrangements frequently result in late 
payments and eliminate music publishers' opportunities to interact with 
pass-through licensees. Copyright Owners PFF at ]] 842, 862. We have 
already adopted a late fee requirement and decline to adopt an 
additional one \53\ because of the nature of the licensing arrangement, 
which is permitted by 17 U.S.C. 115(a)(3)(A). To the extent that the 
proposed fee is not another late charge but is a request for a higher 
royalty rate for pass-through licenses, we decline to adopt the 
proposal because Copyright Owners failed to present any credible 
testimony or marketplace evidence supporting the 3% figure. For the 
same reasons, we also decline to adopt Copyright Owners' request for 
attorneys fees on the collection of late payments. See Copyright Owners 
PFF at ]] 842, 866. In addition, Section 115(c)(6) enumerates the 
remedy for noncompliance by a compulsory licensee, which does not 
include the attorneys fees requested by Copyright Owners.
---------------------------------------------------------------------------

    \53\ The surcharge is in effect a triple charge because the 
proposed fee is twice the amount of the late fee that we have 
adopted.
---------------------------------------------------------------------------

    The remaining proposals of the parties fall within the rubric of 
requests for ``clarification'' of the statute. DiMA seeks a 
determination as to the scope of the license with respect to copies 
made in the delivery of digital music. DiMA PFF at ] 240; DiMA Second 
Amended Proposed Rates and Terms at 4. RIAA makes the same request, 
albeit proposing slightly different language. RIAA also seeks a 
determination that product containing musical works is not distributed 
(described by RIAA as ``unlocked'') until accessed by the consumer, 
plus a determination that multiple reproductions contained within a 
single product are considered only one licensed instance--and 
generating only one royalty fee--under the statute. RIAA PFF at ]] 
1674-76, 1678-82; RIAA Second Amended Proposal at 6. And Copyright 
Owners seek a ruling that the royalty obligation of the statute is 
triggered when a product is manufactured and distributed, as opposed to 
only manufactured. Copyright Owners PFF at ]] 842, 867; Copyright 
Owners Amended Proposed Rates and Terms at 4. All of these requests 
suffer from the same infirmity: they require the Judges to interpret 
the scope, operation and/or obligations of the Section 115 license, 
which is inconsistent with our authority in the proceeding to establish 
rates and terms of royalty payments. Accord, Memorandum Opinion on 
Material Questions of Law, Docket No. RF 2008-1 at 10 (August 8, 2008); 
see also, 73 FR 48399 (August 19, 2008). We therefore decline to adopt 
them.

VI. Determination and Order

    Having fully considered the record, the Copyright Royalty Judges 
make the above Findings of Fact based on the record. Relying upon these 
Findings of Fact, the Copyright Royalty Judges unanimously adopt every 
portion of this Determination of the Rates and Terms for the making and 
distribution of phonorecords, including digital phonorecord deliveries 
(``DPDs''), under the compulsory license set forth in section 115 of 
the Copyright Act.


[[Page 4529]]



    So Ordered.
James Scott Sledge,
Chief U.S. Copyright Royalty Judge.
William J. Roberts, Jr.,
Copyright Royalty Judge.
Stanley C. Wisniewski,
Copyright Royalty Judge.
    Dated: November 24, 2008.

List of Subjects in 37 CFR Part 385

    Copyright, Phonorecords, Recordings.

Final Regulations

0
For the reasons set forth in the preamble, the Copyright Royalty Judges 
are adding Part 385 to Chapter III of title 37 of the Code of Federal 
Regulations to read as follows:

PART 385--RATES AND TERMS FOR USE OF MUSICAL WORKS UNDER COMPULSORY 
LICENSE FOR MAKING AND DISTRIBUTING OF PHYSICAL AND DIGITAL 
PHONORECORDS

Subpart A--Physical Phonorecord Deliveries, Permanent Digital Downloads 
and Ringtones
Sec.
385.1 General.
385.2 Definitions.
385.3 Royalty rates for making and distributing phonorecords.
385.4 Late payments.
Subpart B--Interactive Streaming, Other Incidental Digital Phonorecord 
Deliveries and Limited Downloads
Sec.
385.10 General.
385.11 Definitions.
385.12 Calculation of royalty payments in general.
385.13 Minimum royalty rates and subscriber-based royalty floors for 
specific types of services.
385.14 Promotional royalty rate.
385.15 Timing of payments.
385.16 Reproduction and distribution rights covered.
385.17 Effect of rates.

    Authority: 17 U.S.C. 115, 801(b)(1), 804(b)(4).

Subpart A--Physical Phonorecord Deliveries, Permanent Digital 
Downloads and Ringtones


Sec.  385.1   General.

    (a) Scope. This subpart establishes rates and terms of royalty 
payments for making and distributing phonorecords, including by means 
of digital phonorecord deliveries, in accordance with the provisions of 
17 U.S.C. 115.
    (b) Legal compliance. Licensees relying upon the compulsory license 
set forth in 17 U.S.C. 115 shall comply with the requirements of that 
section, the rates and terms of this subpart, and any other applicable 
regulations.
    (c) Relationship to voluntary agreements. Notwithstanding the 
royalty rates and terms established in this subpart, the rates and 
terms of any license agreements entered into by Copyright Owners and 
Licensees shall apply in lieu of the rates and terms of this subpart to 
use of musical works within the scope of such agreements.


Sec.  385.2   Definitions.

    For purposes of this subpart, the following definitions apply:
    Copyright Owners are nondramatic musical work copyright owners who 
are entitled to royalty payments made under this subpart pursuant to 
the compulsory license under 17 U.S.C. 115.
    Digital phonorecord delivery means a digital phonorecord delivery 
as defined in 17 U.S.C. 115(d).
    Licensee is a person or entity that has obtained a compulsory 
license under 17 U.S.C. 115, and the implementing regulations, to make 
and distribute phonorecords of a nondramatic musical work, including by 
means of a digital phonorecord delivery.
    Permanent digital download means a digital phonorecord delivery 
that is distributed in the form of a download that may be retained and 
played on a permanent basis.
    Ringtone means a phonorecord of a partial musical work distributed 
as a digital phonorecord delivery in a format to be made resident on a 
telecommunications device for use to announce the reception of an 
incoming telephone call or other communication or message or to alert 
the receiver to the fact that there is a communication or message.


Sec.  385.3   Royalty rates for making and distributing phonorecords.

    (a) Physical phonorecord deliveries and permanent digital 
downloads. For every physical phonorecord and permanent digital 
download made and distributed, the royalty rate payable for each work 
embodied in such phonorecord shall be either 9.1 cents or 1.75 cents 
per minute of playing time or fraction thereof, whichever amount is 
larger.
    (b) Ringtones. For every ringtone made and distributed, the royalty 
rate payable for each work embodied therein shall be 24 cents.


Sec.  385.4   Late payments.

    A Licensee shall pay a late fee of 1.5% per month, or the highest 
lawful rate, whichever is lower, for any payment received by the 
Copyright Owner after the due date set forth in ( 201.19(e)(7)(i) of 
this title. Late fees shall accrue from the due date until payment is 
received by the Copyright Owner.

Subpart B--Interactive Streaming, Other Incidental Digital 
Phonorecord Deliveries and Limited Downloads


Sec.  385.10  General.

    (a) Scope. This subpart establishes rates and terms of royalty 
payments for interactive streams and limited downloads of musical works 
by subscription and nonsubscription digital music services in 
accordance with the provisions of 17 U.S.C. 115.
    (b) Legal compliance. A licensee that makes or authorizes 
interactive streams or limited downloads of musical works through 
subscription or nonsubscription digital music services pursuant to 17 
U.S.C. 115 shall comply with the requirements of that section, the 
rates and terms of this subpart, and any other applicable regulations.


Sec.  385.11  Definitions.

    For purposes of this subpart, the following definitions shall 
apply:
    Interactive stream means a stream of a sound recording of a musical 
work, where the performance of the sound recording by means of the 
stream is not exempt under 17 U.S.C. 114(d)(1) and does not in itself 
or as a result of a program in which it is included qualify for 
statutory licensing under 17 U.S.C. 114(d)(2). An interactive stream is 
an incidental digital phonorecord delivery under 17 U.S.C. 115(c)(3)(C) 
and (D).
    Licensee means a person that has obtained a compulsory license 
under 17 U.S.C. 115 and its implementing regulations.
    Licensed activity means interactive streams or limited downloads of 
musical works, as applicable.
    Limited download means a digital transmission of a sound recording 
of a musical work to an end user, other than a stream, that results in 
a specifically identifiable reproduction of that sound recording that 
is only accessible for listening for--
    (1) An amount of time not to exceed 1 month from the time of the 
transmission (unless the service, in lieu of retransmitting the same 
sound recording as another limited download, separately and upon 
specific request of the end user made through a live network 
connection, reauthorizes use for another time period not to exceed 1 
month), or in the case of a subscription transmission, a period of time 
following the end of the applicable subscription no longer than a 
subscription renewal period or 3 months, whichever is shorter; or
    (2) A specified number of times not to exceed 12 (unless the 
service, in lieu of

[[Page 4530]]

retransmitting the same sound recording as another limited download, 
separately and upon specific request of the end user made through a 
live network connection, reauthorizes use of another series of 12 or 
fewer plays), or in the case of a subscription transmission, 12 times 
after the end of the applicable subscription.
    (3) A limited download is a general digital phonorecord delivery 
under 17 U.S.C. 115(c)(3)(C) and (D).
    Offering means a service's offering of licensed activity that is 
subject to a particular rate set forth in Sec.  385.13(a) (e.g., a 
particular subscription plan available through the service).
    Promotional royalty rate means the statutory royalty rate of zero 
in the case of certain promotional interactive streams and certain 
promotional limited downloads, as provided in Sec.  385.14.
    Publication date means January 26, 2009.
    Record company means a person or entity that
    (1) Is a copyright owner of a sound recording of a musical work;
    (2) In the case of a sound recording of a musical work fixed before 
February 15, 1972, has rights to the sound recording, under the common 
law or statutes of any State, that are equivalent to the rights of a 
copyright owner of a sound recording of a musical work under title 17, 
United States Code;
    (3) Is an exclusive licensee of the rights to reproduce and 
distribute a sound recording of a musical work; or
    (4) Performs the functions of marketing and authorizing the 
distribution of a sound recording of a musical work under its own 
label, under the authority of the copyright owner of the sound 
recording.
    Relevant page means a page (including a Web page, screen or 
display) from which licensed activity offered by a service is directly 
available to end users, but only where the offering of licensed 
activity and content that directly relates to the offering of licensed 
activity (e.g., an image of the artist or artwork closely associated 
with such offering, artist or album information, reviews of such 
offering, credits and music player controls) comprises 75% or more of 
the space on that page, excluding any space occupied by advertising. A 
licensed activity is directly available to end users from a page if 
sound recordings of musical works can be accessed by end users for 
limited downloads or interactive streams from such page (in most cases 
this will be the page where the limited download or interactive stream 
takes place).
    Service means that entity (which may or may not be the licensee) 
that, with respect to the licensed activity,
    (1) Contracts with or has a direct relationship with end users in a 
case where a contract or relationship exists, or otherwise controls the 
content made available to end users;
    (2) Is able to report fully on service revenue from the provision 
of the licensed activity to the public, and to the extent applicable, 
verify service revenue through an audit; and
    (3) Is able to report fully on usage of musical works by the 
service, or procure such reporting, and to the extent applicable, 
verify usage through an audit.
    Service revenue. (1) Subject to paragraphs (2) through (5) of the 
definition of ``Service revenue,'' and subject to U.S. Generally 
Accepted Accounting Principles, service revenue shall mean the 
following:
    (i) All revenue recognized by the service from end users from the 
provision of licensed activity;
    (ii) All revenue recognized by the service by way of sponsorship 
and commissions as a result of the inclusion of third-party ``in-
stream'' or ``in-download'' advertising as part of licensed activity 
(i.e., advertising placed immediately at the start, end or during the 
actual delivery, by way of interactive streaming or limited downloads, 
as applicable, of a musical work); and
    (iii) All revenue recognized by the service, including by way of 
sponsorship and commissions, as a result of the placement of third-
party advertising on a relevant page of the service or on any page that 
directly follows such relevant page leading up to and including the 
limited download or interactive streaming, as applicable, of a musical 
work; provided that, in the case where more than one service is 
actually available to end users from a relevant page, any advertising 
revenue shall be allocated between such services on the basis of the 
relative amounts of the page they occupy.
    (2) In each of the cases identified in paragraph (1) of the 
definition of ``Service revenue,'' such revenue shall, for the 
avoidance of doubt,
    (i) Include any such revenue recognized by the service, or if not 
recognized by the service, by any associate, affiliate, agent or 
representative of such service in lieu of its being recognized by the 
service;
    (ii) Include the value of any barter or other nonmonetary 
consideration;
    (iii) Not be reduced by credit card commissions or similar payment 
process charges; and
    (iv) Except as expressly set forth in this subpart, not be subject 
to any other deduction or set-off other than refunds to end users for 
licensed activity that they were unable to use due to technical faults 
in the licensed activity or other bona fide refunds or credits issued 
to end users in the ordinary course of business.
    (3) In each of the cases identified in paragraph (1) of the 
definition of ``Service revenue,'' such revenue shall, for the 
avoidance of doubt, exclude revenue derived solely in connection with 
services and activities other than licensed activity, provided that 
advertising or sponsorship revenue shall be treated as provided in 
paragraphs (2) and (4) of the definition of ``Service revenue.'' By way 
of example, the following kinds of revenue shall be excluded:
    (i) Revenue derived from non-music voice, content and text 
services;
    (ii) Revenue derived from other non-music products and services 
(including search services, sponsored searches and click-through 
commissions); and
    (iii) Revenue derived from music or music-related products and 
services that are not or do not include licensed activity.
    (4) For purposes of paragraph (1) of the definition of ``Service 
revenue,'' advertising or sponsorship revenue shall be reduced by the 
actual cost of obtaining such revenue, not to exceed 15%.
    (5) Where the licensed activity is provided to end users as part of 
the same transaction with one or more other products or services that 
are not a music service engaged in licensed activity, then the revenue 
deemed to be recognized from end users for the service for the purpose 
of the definition in paragraph (1) of the definition of ``Service 
revenue'' shall be the revenue recognized from end users for the bundle 
less the standalone published price for end users for each of the other 
component(s) of the bundle; provided that, if there is no such 
standalone published price for a component of the bundle, then the 
average standalone published price for end users for the most closely 
comparable product or service in the U.S. shall be used or, if more 
than one such comparable exists, the average of such standalone prices 
for such comparables shall be used. In connection with such a bundle, 
if a record company providing sound recording rights to the service
    (i) Recognizes revenue (in accordance with U.S. Generally Accepted 
Accounting Principles, and including for the avoidance of doubt barter 
or nonmonetary consideration) from a

[[Page 4531]]

person or entity other than the service providing the licensed activity 
and;
    (ii) Such revenue is received, in the context of the transactions 
involved, as consideration for the ability to make interactive streams 
or limited downloads of sound recordings, then such revenue shall be 
added to the amounts expensed by the service for purposes of Sec.  
385.13(b). Where the service is the licensee, if the service provides 
the record company all information necessary for the record company to 
determine whether additional royalties are payable by the service 
hereunder as a result of revenue recognized from a person or entity 
other than the service as described in the immediately preceding 
sentence, then the record company shall provide such further 
information as necessary for the service to calculate the additional 
royalties and indemnify the service for such additional royalties. The 
sole obligation of the record company shall be to pay the licensee such 
additional royalties if actually payable as royalties hereunder; 
provided, however, that this shall not affect any otherwise existing 
right or remedy of the copyright owner nor diminish the licensee's 
obligations to the copyright owner.
    Stream means the digital transmission of a sound recording of a 
musical work to an end user--
    (1) To allow the end user to listen to the sound recording, while 
maintaining a live network connection to the transmitting service, 
substantially at the time of transmission, except to the extent that 
the sound recording remains accessible for future listening from a 
streaming cache reproduction;
    (2) Using technology that is designed such that the sound recording 
does not remain accessible for future listening, except to the extent 
that the sound recording remains accessible for future listening from a 
streaming cache reproduction; and
    (3) That is also subject to licensing as a public performance of 
the musical work.
    Streaming cache reproduction means a reproduction of a sound 
recording of a musical work made on a computer or other receiving 
device by a service solely for the purpose of permitting an end user 
who has previously received a stream of such sound recording to play 
such sound recording again from local storage on such computer or other 
device rather than by means of a transmission; provided that the user 
is only able to do so while maintaining a live network connection to 
the service, and such reproduction is encrypted or otherwise protected 
consistent with prevailing industry standards to prevent it from being 
played in any other manner or on any device other than the computer or 
other device on which it was originally made.
    Subscription service means a digital music service for which end 
users are required to pay a fee to access the service for defined 
subscription periods of 3 years or less (in contrast to, for example, a 
service where the basic charge to users is a payment per download or 
per play), whether such payment is made for access to the service on a 
standalone basis or as part of a bundle with one or more other products 
or services, and including any use of such a service on a trial basis 
without charge as described in Sec.  385.14(b).


Sec.  385.12  Calculation of royalty payments in general.

    (a) Applicable royalty. Licensees that make or authorize licensed 
activity pursuant to 17 U.S.C. 115 shall pay royalties therefor that 
are calculated as provided in this section, subject to the minimum 
royalties and subscriber-based royalty floors for specific types of 
services provided in Sec.  385.13, except as provided for certain 
promotional uses in Sec.  385.14.
    (b) Rate calculation methodology. Royalty payments for licensed 
activity shall be calculated as provided in paragraph (b) of this 
section. If a service includes different offerings, royalties must be 
separately calculated with respect to each such offering. Uses subject 
to the promotional royalty rate shall be excluded from the calculation 
of royalties due, as further described in this section and the 
following Sec.  385.13.
    (1) Step 1: Calculate the All-In Royalty for the Service. For each 
accounting period, the all-in royalty for each offering of the service 
is the greater of
    (i) The applicable percentage of service revenue as set forth in 
paragraph (c) of this section (excluding any service revenue derived 
solely from licensed activity uses subject to the promotional royalty 
rate), and
    (ii) The minimum specified in Sec.  385.13 of the offering 
involved.
    (2) Step 2: Subtract Applicable Performance Royalties. From the 
amount determined in step 1 in paragraph (b)(1) of this section, for 
each offering of the service, subtract the total amount of royalties 
for public performance of musical works that has been or will be 
expensed by the service pursuant to public performance licenses in 
connection with uses of musical works through such offering during the 
accounting period that constitute licensed activity (other than 
licensed activity subject to the promotional royalty rate). While this 
amount may be the total of the service's payments for that offering for 
the accounting period under its agreements with performing rights 
societies as defined in 17 U.S.C. 101, it will be less than the total 
of such public performance payments if the service is also engaging in 
public performance of musical works that does not constitute licensed 
activity. In the latter case, the amount to be subtracted for public 
performance payments shall be the amount of such payments allocable to 
licensed activity uses (other than promotional royalty rate uses) 
through the relevant offering, as determined in relation to all uses of 
musical works for which the public performance payments are made for 
the accounting period. Such allocation shall be made on the basis of 
plays of musical works or, where per-play information is unavailable 
due to bona fide technical limitations as described in step 4 in 
paragraph (b)(4) of this section, using the same alternative 
methodology as provided in step 4.
    (3) Step 3: Determine the Payable Royalty Pool. This is the amount 
payable for the reproduction and distribution of all musical works used 
by the service by virtue of its licensed activity for a particular 
offering during the accounting period. This amount is the greater of
    (i) The result determined in step 2 in paragraph (b)(2) of this 
section, and
    (ii) The subscriber-based royalty floor resulting from the 
calculations described in Sec.  385.13.
    (4) Step 4: Calculate the Per-Work Royalty Allocation for Each 
Relevant Work. This is the amount payable for the reproduction and 
distribution of each musical work used by the service by virtue of its 
licensed activity through a particular offering during the accounting 
period. To determine this amount, the result determined in step 3 in 
paragraph (b)(3) of this section must be allocated to each musical work 
used through the offering. The allocation shall be accomplished by 
dividing the payable royalty pool determined in step 3 for such 
offering by the total number of plays of all musical works through such 
offering during the accounting period (other than promotional royalty 
rate plays) to yield a per-play allocation, and multiplying that result 
by the number of plays of each musical work (other than promotional 
royalty rate plays) through the offering during the accounting period. 
For purposes of determining the per-work royalty allocation in all 
calculations under this step 4 only (i.e., after the payable royalty 
pool has been determined), for sound

[[Page 4532]]

recordings of musical works with a playing time of over 5 minutes, each 
play on or after October 1, 2010 shall be counted as provided in 
paragraph (d) of this section. Notwithstanding the foregoing, if the 
service is not capable of tracking play information due to bona fide 
limitations of the available technology for services of that nature or 
of devices useable with the service, the per-work royalty allocation 
may instead be accomplished in a manner consistent with the methodology 
used by the service for making royalty payment allocations for the use 
of individual sound recordings.
    (c) Percentage of service revenue. The percentage of service 
revenue applicable under paragraph (b) of this section is 10.5%, except 
that such percentage shall be discounted by 2% (i.e., to 8.5%) in the 
case of licensed activity occurring on or before December 31, 2007.
    (d) Overtime adjustment. For licensed activity on or after October 
1, 2010, for purposes of the calculations in step 4 in paragraph (b)(4) 
of this section only, for sound recordings of musical works with a 
playing time of over 5 minutes, adjust the number of plays as follows:
    (1) 5:01 to 6:00 minutes--Each play = 1.2 plays
    (2) 6:01 to 7:00 minutes--Each play = 1.4 plays
    (3) 7:01 to 8:00 minutes--Each play = 1.6 plays
    (4) 8:01 to 9:00 minutes--Each play = 1.8 plays
    (5) 9:01 to 10:00 minutes--Each play = 2.0 plays
    (6) For playing times of greater than 10 minutes, continue to add 
.2 for each additional minute or fraction thereof.
    (e) Accounting. The calculations required by paragraph (b) of this 
section shall be made in good faith and on the basis of the best 
knowledge, information and belief of the licensee at the time payment 
is due, and subject to the additional accounting and certification 
requirements of 17 U.S.C. 115(c)(5) and Sec.  201.19 of this title. 
Without limitation, a licensee's statements of account shall set forth 
each step of its calculations with sufficient information to allow the 
copyright owner to assess the accuracy and manner in which the licensee 
determined the payable royalty pool and per-play allocations (including 
information sufficient to demonstrate whether and how a minimum royalty 
or subscriber-based royalty floor pursuant to Sec.  385.13 does or does 
not apply) and, for each offering reported, also indicate the type of 
licensed activity involved and the number of plays of each musical work 
(including an indication of any overtime adjustment applied) that is 
the basis of the per-work royalty allocation being paid.


Sec.  385.13  Minimum royalty rates and subscriber-based royalty floors 
for specific types of services.

    (a) In general. The following minimum royalty rates and subscriber-
based royalty floors shall apply to the following types of licensed 
activity:
    (1) Standalone non-portable subscription--streaming only. Except as 
provided in paragraph (a)(4) of this section, in the case of a 
subscription service through which an end user can listen to sound 
recordings only in the form of interactive streams and only from a non-
portable device to which such streams are originally transmitted while 
the device has a live network connection, the minimum for use in step 1 
of Sec.  385.12(b)(1) is the lesser of subminimum II as described in 
paragraph (c) of this section for the accounting period and the 
aggregate amount of 50 cents per subscriber per month. The subscriber-
based royalty floor for use in step 3 of Sec.  385.12(b)(3) is the 
aggregate amount of 15 cents per subscriber per month.
    (2) Standalone non-portable subscription--mixed. Except as provided 
in paragraph (a)(4) of this section, in the case of a subscription 
service through which an end user can listen to sound recordings either 
in the form of interactive streams or limited downloads but only from a 
non-portable device to which such streams or downloads are originally 
transmitted, the minimum for use in step 1 of Sec.  385.12(b)(1) is the 
lesser of the subminimum I as described in paragraph (b) of this 
section for the accounting period and the aggregate amount of 50 cents 
per subscriber per month. The subscriber-based royalty floor for use in 
step 3 of Sec.  385.12(b)(3) is the aggregate amount of 30 cents per 
subscriber per month.
    (3) Standalone portable subscription service. Except as provided in 
paragraph (a)(4) of this section, in the case of a subscription service 
through which an end user can listen to sound recordings in the form of 
interactive streams or limited downloads from a portable device, the 
minimum for use in step 1 of Sec.  385.12(b)(1) is the lesser of 
subminimum I as described in paragraph (b) of this section for the 
accounting period and the aggregate amount of 80 cents per subscriber 
per month. The subscriber-based royalty floor for use in step 3 of 
Sec.  385.12(b)(3) is the aggregate amount of 50 cents per subscriber 
per month.
    (4) Bundled subscription services. In the case of a subscription 
service made available to end users with one or more other products or 
services as part of a single transaction without pricing for the 
subscription service separate from the product(s) or service(s) with 
which it is made available (e.g., a case in which a user can buy a 
portable device and one-year access to a subscription service for a 
single price), the minimum for use in step 1 of Sec.  385.12(b)(1) is 
subminimum I as described in paragraph (b) of this section for the 
accounting period. The subscriber-based royalty floor for use in step 3 
of Sec.  385.12(b)(3) is the aggregate amount of 25 cents per month for 
each end user who has made at least one play of a licensed work during 
such month (each such end user to be considered an ``active 
subscriber'').
    (5) Free nonsubscription/ad-supported services. In the case of a 
service offering licensed activity free of any charge to the end user, 
the minimum for use in step 1 of Sec.  385.12(b)(1) is subminimum II 
described in paragraph (c) of this section for the accounting period. 
There is no subscriber-based royalty floor for use in step 3 of Sec.  
385.12(b)(3).
    (b) Computation of subminimum I. For purposes of paragraphs (a)(2), 
(3) and (4) of this section, and with reference to paragraph (5) of the 
definition of ``service revenue'' in Sec.  385.11 if applicable, 
subminimum I for an accounting period means the aggregate of the 
following with respect to all sound recordings of musical works used in 
the relevant offering of the service during the accounting period--
    (1) In cases in which a record company is the licensee under 17 
U.S.C. 115 and a third-party service has obtained from the record 
company the rights to make interactive streams or limited downloads of 
a sound recording together with the right to reproduce and distribute 
the musical work embodied therein, 17.36% of the total amount expensed 
by the service in accordance with U.S. Generally Accepted Accounting 
Principles, which for the avoidance of doubt shall include the value of 
any barter or other nonmonetary consideration provided by the service, 
for such rights for the accounting period, except that for licensed 
activity occurring on or before December 31, 2007, subminimum I for an 
accounting period shall be 14.53% of the amount expensed by the service 
for such rights for the accounting period.
    (2) In cases in which the relevant service is the licensee under 17 
U.S.C. 115 and the relevant service has obtained from a third-party 
record company the rights to make interactive streams or limited 
downloads of a

[[Page 4533]]

sound recording without the right to reproduce and distribute the 
musical work embodied therein, 21% of the total amount expensed by the 
service in accordance with U.S. Generally Accepted Accounting 
Principles, which for the avoidance of doubt shall include the value of 
any barter or other nonmonetary consideration provided by the service, 
for such sound recording rights for the accounting period, except that 
for licensed activity occurring on or before December 31, 2007, 
subminimum I for an accounting period shall be 17% of the amount 
expensed by the service for such sound recording rights for the 
accounting period.
    (c) Computation of subminimum II. For purposes of paragraphs(a)(1) 
and (5) of this section, subminimum II for an accounting period means 
the aggregate of the following with respect to all sound recordings of 
musical works used by the relevant service during the accounting 
period--
    (1) In cases in which a record company is the licensee under 17 
U.S.C. 115 and a third-party service has obtained from the record 
company the rights to make interactive streams and limited downloads of 
a sound recording together with the right to reproduce and distribute 
the musical work embodied therein, 18% of the total amount expensed by 
the service in accordance with U.S. Generally Accepted Accounting 
Principles, which for the avoidance of doubt shall include the value of 
any barter or other nonmonetary consideration provided by the service, 
for such rights for the accounting period, except that for licensed 
activity occurring on or before December 31, 2007, subminimum II for an 
accounting period shall be 14.53% of the amount expensed by the service 
for such rights for the accounting period.
    (2) In cases in which the relevant service is the licensee under 17 
U.S.C. 115 and the relevant service has obtained from a third-party 
record company the rights to make interactive streams or limited 
downloads of a sound recording without the right to reproduce and 
distribute the musical work embodied therein, 22% of the total amount 
expensed by the service in accordance with U.S. Generally Accepted 
Accounting Principles, which for the avoidance of doubt shall include 
the value of any barter or other nonmonetary consideration provided by 
the service, for such sound recording rights for the accounting period, 
except that for licensed activity occurring on or before December 31, 
2007, subminimum II for an accounting period shall be 17% of the amount 
expensed by the service for such sound recording rights for the 
accounting period.
    (d) Computation of subscriber-based royalty rates. For purposes of 
paragraph (a) of this section, to determine the minimum or subscriber-
based royalty floor, as applicable to any particular offering, the 
service shall for the relevant offering calculate its total number of 
subscriber-months for the accounting period, taking into account all 
end users who were subscribers for complete calendar months, prorating 
in the case of end users who were subscribers for only part of a 
calendar month, and deducting on a prorated basis for end users covered 
by a free trial period subject to the promotional royalty rate as 
described in Sec.  385.14(b)(2), except that in the case of a bundled 
subscription service, subscriber-months shall instead be determined 
with respect to active subscribers as defined in paragraph (a)(4) of 
this section. The product of the total number of subscriber-months for 
the accounting period and the specified number of cents per subscriber 
(or active subscriber, as the case may be) shall be used as the 
subscriber-based component of the minimum or subscriber-based royalty 
floor, as applicable, for the accounting period.


Sec.  385.14  Promotional royalty rate.

    (a) General provisions. (1) This section establishes a royalty rate 
of zero in the case of certain promotional interactive streaming 
activities, and of certain promotional limited downloads offered in the 
context of a free trial period for a digital music subscription service 
under a license pursuant to 17 U.S.C. 115. Subject to the requirements 
of 17 U.S.C. 115 and the additional provisions of paragraphs (b) 
through (e) of this section, the promotional royalty rate shall apply 
to a musical work when a record company transmits or authorizes the 
transmission of interactive streams or limited downloads of a sound 
recording that embodies such musical work, only if--
    (i) The primary purpose of the record company in making or 
authorizing the interactive streams or limited downloads is to promote 
the sale or other paid use of sound recordings by the relevant artists, 
including such sound recording, through established retail channels or 
the paid use of one or more established retail music services through 
which the sound recording is available, and not to promote any other 
good or service;
    (ii) Either--
    (A) The sound recording (or a different version of the sound 
recording embodying the same musical work) is being lawfully 
distributed and offered to consumers through the established retail 
channels or services described in paragraph (a)(1)(i) of this section; 
or
    (B) In the case of a sound recording of a musical work being 
prepared for commercial release but not yet released, the record 
company has a good faith intention of lawfully distributing and 
offering to consumers the sound recording (or a different version of 
the sound recording embodying the same musical work) through the 
established retail channels or services described in paragraph 
(a)(1)(i) of this section within 90 days after the commencement of the 
first promotional use authorized under this section (and in fact does 
so, unless it can demonstrate that notwithstanding its bona fide 
intention, it unexpectedly did not meet the scheduled release date);
    (iii) In connection with authorizing the promotional interactive 
streams or limited downloads, the record company has obtained from the 
service it authorizes a written representation that--
    (A) In the case of a promotional use commencing on or after October 
1, 2010, except interactive streaming subject to paragraph (d) of this 
section, the service agrees to maintain for a period of no less than 5 
years from the conclusion of the promotional activity complete and 
accurate records of the relevant authorization and dates on which the 
promotion was conducted, and identifying each sound recording of a 
musical work made available through the promotion, the licensed 
activity involved, and the number of plays of such recording;
    (B) The service is in all material respects operating with 
appropriate license authority with respect to the musical works it is 
using for promotional and other purposes; and
    (C) The representation is signed by a person authorized to make the 
representation on behalf of the service;
    (iv) Upon receipt by the record company of written notice from the 
copyright owner of a musical work or agent of the copyright owner 
stating in good faith that a particular service is in a material manner 
operating without appropriate license authority from such copyright 
owner, the record company shall within 5 business days withdraw by 
written notice its authorization of such uses of such copyright owner's 
musical works under the promotional royalty rate by that service;
    (v) The interactive streams or limited downloads are offered free 
of any charge to the end user and, except in the case of interactive 
streaming subject to paragraph (d) of this section in the case

[[Page 4534]]

of a free trial period for a digital music subscription service, no 
more than 5 sound recordings at a time are streamed in response to any 
individual request of an end user;
    (vi) The interactive streams and limited downloads are offered in a 
manner such that the user is at the same time (e.g., on the same Web 
page) presented with a purchase opportunity for the relevant sound 
recording or an opportunity to subscribe to a paid service offering the 
sound recording, or a link to such a purchase or subscription 
opportunity, except--
    (A) In the case of interactive streaming of a sound recording being 
prepared for commercial release but not yet released, certain mobile 
applications or other circumstances in which the foregoing is 
impracticable in view of the current state of the relevant technology; 
and
    (B) In the case of a free trial period for a digital music 
subscription service, if end users are periodically offered an 
opportunity to subscribe to the service during such free trial period; 
and
    (vii) The interactive streams and limited downloads are not 
provided in a manner that is likely to cause mistake, to confuse or to 
deceive, reasonable end users as to the endorsement or association of 
the author of the musical work with any product, service or activity 
other than the sale or paid use of sound recordings or paid use of a 
music service through which sound recordings are available. Without 
limiting the foregoing, upon receipt of written notice from the 
copyright owner of a musical work or agent of the copyright owner 
stating in good faith that a particular use of such work under this 
section violates the limitation set forth in this paragraph 
(a)(1)(vii), the record company shall promptly cease such use of that 
work, and within 5 business days withdraw by written notice its 
authorization of such use by all relevant third parties it has 
authorized under this section.
    (2) To rely upon the promotional royalty rate, a record company 
making or authorizing interactive streams or limited downloads shall 
keep complete and accurate contemporaneous written records of such 
uses, including the sound recordings and musical works involved, the 
artists, the release dates of the sound recordings, a brief statement 
of the promotional activities authorized, the identity of the service 
or services where each promotion is authorized (including the Internet 
address if applicable), the beginning and end date of each period of 
promotional activity authorized, and the representation required by 
paragraph (a)(1)(iii) of this section; provided that, in the case of 
trial subscription uses, such records shall instead consist of the 
contractual terms that bear upon promotional uses by the particular 
digital music subscription services it authorizes; and further provided 
that, if the record company itself is conducting the promotion, it 
shall also maintain any additional records described in paragraph 
(a)(1)(iii)(A) of this section. The records required by this paragraph 
(a)(2) shall be maintained for no less time than the record company 
maintains records of usage of royalty-bearing uses involving the same 
type of licensed activity in the ordinary course of business, but in no 
event for less than 5 years from the conclusion of the promotional 
activity to which they pertain. If the copyright owner of a musical 
work or its agent requests a copy of the information to be maintained 
under this paragraph (a)(2) with respect to a specific promotion or 
relating to a particular sound recording of a musical work, the record 
company shall provide complete and accurate documentation within 10 
business days, except for any information required under paragraph 
(a)(1)(iii)(A) of this section, which shall be provided within 20 
business days, and provided that if the copyright owner or agent 
requests information concerning a large volume of promotions or sound 
recordings, the record company shall have a reasonable time, in view of 
the amount of information requested, to respond to any request of such 
copyright owner or agent. If the record company does not provide 
required information within the required time, and upon receipt of 
written notice citing such failure does not provide such information 
within a further 10 business days, the uses will be considered not to 
be subject to the promotional royalty rate and the record company (but 
not any third-party service it has authorized) shall be liable for any 
payment due for such uses; provided, however, that all rights and 
remedies of the copyright owner with respect to unauthorized uses shall 
be preserved.
    (3) If the copyright owner of a musical work or its agent requests 
a copy of the information to be maintained under paragraph 
(a)(1)(iii)(A) of this section by a service authorized by a record 
company with respect to a specific promotion, the service shall provide 
complete and accurate documentation within 20 business days, provided 
that if the copyright owner or agent requests information concerning a 
large volume of promotions or sound recordings, the service shall have 
a reasonable time, in view of the amount of information requested, to 
respond to any request of such copyright owner or agent. If the service 
does not provide required information within the required time, and 
upon receipt of written notice citing such failure does not provide 
such information within a further 10 business days, the uses will be 
considered not to be subject to the promotional royalty rate and the 
service (but not the record company) will be liable for any payment due 
for such uses; provided, however, that all rights and remedies of the 
copyright owner with respect to unauthorized uses shall be preserved.
    (4) The promotional royalty rate is exclusively for audio-only 
interactive streaming and limited downloads of musical works subject to 
licensing under 17 U.S.C. 115. The promotional royalty rate does not 
apply to any other use under 17 U.S.C. 115; nor does it apply to public 
performances, audiovisual works, lyrics or other uses outside the scope 
of 17 U.S.C. 115. Without limitation, uses subject to licensing under 
17 U.S.C. 115 that do not qualify for the promotional royalty rate 
(including without limitation interactive streaming or limited 
downloads of a musical work beyond the time limitations applicable to 
the promotional royalty rate) require payment of applicable royalties. 
This section is based on an understanding of industry practices and 
market conditions at the time of its development, among other things. 
The terms of this section shall be subject to de novo review and 
consideration (or elimination altogether) in future proceedings before 
the Copyright Royalty Judges. Nothing in this section shall be 
interpreted or construed in such a manner as to nullify or diminish any 
limitation, requirement or obligation of 17 U.S.C. 115 or other 
protection for musical works afforded by the Copyright Act, 17 U.S.C. 
101 et seq. For the avoidance of doubt, however, except as provided in 
paragraph (a) of this section, statements of account under 17 U.S.C. 
115 need not reflect interactive streams or limited downloads subject 
to the promotional royalty rate.
    (b) Interactive streaming and limited downloads of full-length 
musical works through third-party services. In addition to those of 
paragraph (a) of this section, the provisions of this paragraph (b) 
apply to interactive streaming, and limited downloads (in the context 
of a free trial period for a digital music subscription service), 
authorized by record companies under the promotional royalty rate 
through third-party services (including Web sites) that is not subject 
to paragraphs (c) or (d) of

[[Page 4535]]

this section. Such interactive streams and limited downloads may be 
made or authorized by a record company under the promotional royalty 
rate only if--
    (1) No cash, other monetary payment, barter or other consideration 
for making or authorizing the relevant interactive streams or limited 
downloads is received by the record company, its parent company, any 
entity owned in whole or in part by or under common ownership with the 
record company, or any other person or entity acting on behalf of or in 
lieu of the record company, except for in-kind promotional 
consideration used to promote the sale or paid use of sound recordings 
or the paid use of music services through which sound recordings are 
available;
    (2) In the case of interactive streaming and limited downloads 
offered in the context of a free trial period for a digital music 
subscription service, the free trial period does not exceed 30 
consecutive days per subscriber per two-year period; and
    (3) In contexts other than a free trial period for a digital music 
subscription service, interactive streaming subject to paragraph (b) of 
this section of a particular sound recording is authorized by the 
record company on no more than 60 days total for all services (i.e., 
interactive streaming under paragraph (b) of this section of a 
particular sound recording may be authorized on no more than a total of 
60 days, which need not be consecutive, and on any one such day, 
interactive streams may be offered on one or more services); provided, 
however, that an additional 60 days shall be available each time the 
sound recording is re-released by the record company in a remastered 
form or as a part of a compilation with a different set of sound 
recordings than the original release or any prior compilation including 
such sound recording.
    (4) In the event that a record company authorizes promotional uses 
in excess of the time limitations of paragraph (b) of this section, the 
record company, and not the third-party service it has authorized, 
shall be liable for any payment due for such uses; provided, however, 
that all rights and remedies of the copyright owner with respect to 
unauthorized uses shall be preserved. In the event that a third-party 
service exceeds the scope of any authorization by a record company, the 
service, and not the record company, shall be liable for any payment 
due for such uses; provided, however, that all rights and remedies of 
the copyright owner with respect to unauthorized uses shall be 
preserved.
    (c) Interactive streaming of full-length musical works through 
record company and artist services. In addition to those of paragraph 
(a) of this section, the provisions of this paragraph (c) apply to 
interactive streaming conducted or authorized by record companies under 
the promotional royalty rate through a service (e.g., a Web site) 
directly owned or operated by the record company, or directly owned or 
operated by a recording artist under the authorization of the record 
company, and that is not subject to paragraph (d) of this section. For 
the avoidance of doubt and without limitation, an artist page or site 
on a third-party service (e.g., a social networking service) shall not 
be considered a service operated by the record company or artist. Such 
interactive streams may be made or authorized by a record company under 
the promotional royalty rate only if--
    (1) The interactive streaming subject to this paragraph (c) of a 
particular sound recording is offered or authorized by the record 
company on no more than 90 days total for all services (i.e., 
interactive streaming under this paragraph (c) of a particular sound 
recording may be authorized on no more than a total of 90 days, which 
need not be consecutive, and on any such day, interactive streams may 
be offered on one or more services operated by the record company or 
artist, subject to the provisions of paragraph (b)(2) of this section); 
provided, however, that an additional 90 days shall be available each 
time the sound recording is re-released by the record company in a 
remastered form or as part of a compilation with a different set of 
sound recordings than prior compilations that include that sound 
recording;
    (2) In the case of interactive streaming through a service devoted 
to one featured artist, the interactive streams subject to this 
paragraph (c) of this section of a particular sound recording are made 
or authorized by the record company on no more than one official artist 
site per artist and are recordings of that artist; and
    (3) In the case of interactive streaming through a service that is 
not limited to a single featured artist, all interactive streaming on 
such service (whether eligible for the promotional royalty rate or not) 
is limited to sound recordings of a single record company and its 
affiliates and the service would not reasonably be considered to be a 
meaningful substitute for a paid music service.
    (d) Interactive streaming of clips. In addition to those in 
paragraph (a) of this section, the provisions of this paragraph (d) 
apply to interactive streaming conducted or authorized by record 
companies under the promotional royalty rate of segments of sound 
recordings of musical works with a playing time that does not exceed 
the greater of:
    (1) 30 seconds, or
    (2) 10% of the playing time of the complete sound recording, but in 
no event in excess of 60 seconds. Such interactive streams may be made 
or authorized by a record company under the promotional royalty rate 
without any of the temporal limitations set forth in paragraphs (b) and 
(c) of this section (but subject to the other conditions of paragraphs 
(b) and (c) of this section, as applicable). For clarity, this 
paragraph (d) is strictly limited to the uses described herein and 
shall not be construed as permitting the creation or use of an excerpt 
of a musical work in violation of 17 U.S.C. 106(2) or 115(a)(2) or any 
other right of a musical work owner.
    (e) Activities prior to the publication date. Notwithstanding 
paragraphs (a) through (d) of this section, in the case of licensed 
activity prior to the publication date, the promotional royalty rate 
shall apply to promotional interactive streams, and to limited 
downloads offered in the context of a free trial period for a digital 
music subscription service, that in either case are authorized by the 
relevant record company, if the condition set forth in paragraph 
(a)(1)(i) of this section is satisfied, subject only to the additional 
condition in paragraph (b)(1) of this section, and provided that a free 
trial period for a digital music subscription service authorized by the 
relevant record company shall be considered to be of 30 days' duration. 
In the event of a dispute concerning the eligibility of licensed 
activity prior to the publication date for the promotional royalty 
rate, a service asserting that its licensed activity is eligible for 
the promotional royalty rate shall bear the burden of proving that its 
licensed activity was authorized by the relevant record company and 
shall certify that the condition in paragraph (b)(1) of this section 
was satisfied.


Sec.  385.15  Timing of payments.

    Payment for any accounting period for which payment otherwise would 
be due more than 180 days after the publication date shall be due as 
otherwise provided under 17 U.S.C. 115 and its implementing 
regulations. Payment for any prior accounting period shall be due 180 
days after the publication date.

[[Page 4536]]

Sec.  385.16  Reproduction and distribution rights covered.

    A compulsory license under 17 U.S.C. 115 extends to all 
reproduction and distribution rights that may be necessary for the 
provision of the licensed activity, solely for the purpose of providing 
such licensed activity (and no other purpose).


Sec.  385.17  Effect of rates.

    In any future proceedings under 17 U.S.C. 115(c)(3)(C) and (D), the 
royalty rates payable for a compulsory license shall be established de 
novo.

    Dated: November 24, 2008.
James Scott Sledge,
Chief, U.S. Copyright Royalty Judge.
[FR Doc. E9-1443 Filed 1-23-09; 8:45 am]
BILLING CODE 1410-10-P